TOYAKO, July 9 (RIA Novosti) - President Dmitry Medvedev said on Wednesday that Russia and Japan would continue talks on the South Kuril Islands, a territorial dispute that has overshadowed trade ties.

Speaking at a news conference after the Group of Eight rich nations' summit in northern Japan, Medvedev said: "We agreed that we would continue work on the issue in line with the principles set out earlier."

Medvedev met with Japanese Prime Minister Yasuo Fukuda on the sidelines of the G8 summit on Tuesday, but the leaders failed to make progress on the dispute over the lower part of a chain of Pacific islands the Soviet Union annexed after WWII. However, the Kremlin said they "got closer to understanding each other's positions."

The dispute over the islands, which Japan calls the Northern Territories, has prevented the two countries from signing a formal peace treaty.

"Our meeting showed that our cooperation has bright development prospects, but one problem has persisted in our relations, namely the territorial issue," Medvedev said.