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The North may stage a third test "to demonstrate Kim Jong-Un's military prowess, to improve plutonium-based nuclear weapons and ratchet up military tensions", the Institute of Foreign Affairs and National Security said.
A new test is needed to improve its plutonium-based bombs using data from the second test in May 2009, the institute, which is affiliated to the foreign ministry, said in a report.
The North has been working for decades to build plutonium-based weapons and last month also disclosed a new uranium enrichment complex -- a potential new way to make bombs.
The report said the North is likely to build up its atomic arsenal next year and might test a uranium-based weapon "to maximise the shock to the outside world".
While six-party nuclear disarmament talks may well resume next year, chances of any progress are slim, it said.
The North is thought to have enough plutonium for maybe six to eight weapons but it is not known whether it can fit them to missile warheads. Nevertheless, it frequently raises the prospect of nuclear war.
On Thursday the North vowed readiness for a "sacred war" using its nuclear weapons.
"The revolutionary armed forces... are getting fully prepared to launch a sacred war of justice of Korean style based on the nuclear deterrent at any time necessary to cope with the enemies' actions deliberately pushing the situation to the brink of a war," said armed forces minister Kim Yong-Chun.
The North accuses the South of provoking its November 23 bombardment of Yeonpyeong island, near the disputed Yellow Sea border, by holding a firing drill there.
The South Monday staged another drill on Yeonpyeong but the North did not follow through with threats of a new and deadlier attack.
On Thursday Seoul deployed tanks, artillery and jet fighters in a show of force on the mainland.
And the South's defence ministry announced Friday that a giant Christmas tree near the North Korean border would stay lit until January 8.
The move is likely to anger Pyongyang since the date marks the birthday of Jong-Un, youngest son of leader Kim Jong-Il. The communist North sees the tree topped with a glowing cross as a provocative propaganda symbol.
The ministry said it hoped to send "a message of peace to the North" and the timing was just a coincidence.
An international think-tank urged the two Koreas to accept international arbitration to redraw the flashpoint sea border and lessen the possibility of all-out war.
The International Crisis Group, like many other analysts and the Seoul government, said the North's attacks are linked to moves to install Jong-Un as eventual successor.
They are an apparent attempt "to give the inexperienced heir some appearance of military and strategic prowess", the ICG said in a report.
"They also signal to potential rivals among North Korean elites that Kim Jong-Il is willing to take on the South to promote his son and he would therefore have no problem confronting domestic opponents."
There is "a real danger" the North will continue its attacks, it said.
The South's military, accused of a feeble response to last month's attack, has vowed to hit back harder next time by using air power.
The North offered apparent nuclear concessions to US politician Bill Richardson, who ended a visit to Pyongyang this week.
Richardson said it agreed to readmit UN atomic inspectors and negotiate the sale of nuclear fuel rods to a third party.
The New Mexico governor said Thursday a resumption of six-nation talks -- grouping the two Koreas, the United States, China, Russia and Japan -- could help prevent a new escalation of tensions.
If "they don't react militarily again to this recent drill, then maybe the time has come for the six-party talks," he told CNN, referring to the South Korean exercise staged Thursday.
The North's news agency blamed the United States for the "alarming developments" on the peninsula this year.
It said Washington had orchestrated clashes to test a new military alliance it was forging with Japan and South Korea "to hold hegemony in the Asia-Pacific".
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