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Russian President Vladimir Putin (R) shakes hands with Japanese Prime Minister Shinzo Abe during a meeting on the sidelines of Eastern Economic Forum in Vladivostok, Russia, September 2, 2016. Sputnik/Kremlin/Alexei Druzhinin/via REUTERS

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By Vladimir Soldatkin and Kiyoshi Takenaka

VLADIVOSTOK, Russia (Reuters) - Russia's President Vladimir Putin and Japan's Prime Minister Shinzo Abe agreed on Friday to draw up proposals this year to end a row over a group of disputed islands that has bedevilled relations between their countries for over 70 years.

The dispute stems from the Soviet Union's decision, in the final days of World War Two, to seize the islands - known in Japan as the Northern Territories and in Russia as the Southern Kuriles - that Tokyo says are its sovereign territory.

Concessions over the islands would carry risks for Putin but could boost Japanese investment in Russia at a time when Moscow, battered by low global oil prices and Western sanctions, badly needs an injection of cash.

From Tokyo's perspective, better relations would allow Russia and Japan to form a counter-balance to China, the region's rising power.

Meeting on the sidelines of a business forum on Russia's Pacific coast, the two leaders agreed that officials on both sides would keep working on a draft deal that Abe and Putin would consider when the Russian leader visits Japan in December.

Though Russia and Japan have strong diplomatic and commercial ties, the dispute has prevented them signing a treaty formally ending their World War Two hostilities.

"Particularly regarding a peace treaty, the two of us alone had quite an in-depth discussion. It is now clearer how to proceed in talks based on the 'new approach'," Abe told reporters.

"Finding a solution through leaders' mutual trust would be the only way to break away from this abnormal condition, where no peace treaty has been concluded for more than 70 years."

Abe said he wanted the December summit with Putin to take place in his home town of Nagato city "in a relaxing atmosphere so that talks on a peace treaty would accelerate."

"WE DON'T TRADE IN TERRITORIES"

Russian Foreign Minister Sergei Lavrov told reporters he detected a new willingness from the Japanese government to find common ground.

"Of course the leaders discussed the issue of a peace treaty," Lavrov said.

Referring to the preparatory work being carried out by officials, he said: "There was an agreement that we will continue these consultations and the results will be passed on during the visit of the Russian leader to Japan, which will take place ... before the end of the year."

Any concessions by Putin on the islands would carry political risks for him, potentially hurting the image he has crafted at home as a leader who stands up for Russian national interests in the face of outside aggression.

In an interview with Bloomberg news agency before he met Abe, Putin indicated he would not contemplate giving up territory.

"We're not talking about some exchange or some sale," Putin was quoted as saying. "We are talking about finding a solution where neither of the parties would feel defeated or a loser.

"We don’t trade in territories, although the problem of a peace treaty with Japan is a key one," he said, noting that Moscow was keen to work with Tokyo to resolve the problem.

(Additional reporting by Ami Miyazaki and Linda Sieg; Writing by Christian Lowe and William Mallard; Editing by Mark Trevelyan)

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