Vietnam has Southeast Asia's largest Roman Catholic community after the Philippines -- about six million out of a population of 86 million -- but relations have long been strained between Catholics and the Communist Party.
"This is the first time that we've met with a formal, public agenda on the matter of diplomatic relations between the Holy See and Vietnam -- that is progress," said Vatican undersecretary of state Monsignor Pietro Parolin.
Parolin, whose primary task is to maintain the Vatican's relations with other states, was speaking after several days of talks with Vietnamese foreign ministry officials -- the first formal meetings on diplomatic ties.
In 2007, Vietnamese Prime Minister Nguyen Tan Dung made a historic visit to the Vatican, marking a major thaw in relations. Several Vatican delegations had already visited Hanoi.
But tensions have mounted in the past year between Hanoi and Vietnam's Catholics, who have staged repeated protests demanding the return of church lands seized after the communists took power in North Vietnam in 1954.
"Bilateral relations have been difficult at times, and we've been on the brink of a complete break on occasion," a Vietnamese diplomat told AFP on condition of anonymity.
"This first meeting therefore represents a clear evolution, marking the resumption of dialogue between Hanoi and the Vatican," he added, while cautioning that "the road to diplomatic ties is still a long one."
A Western diplomat who asked not to be identified said: "This week is important because it's the first time the Vietnamese government has admitted, 'Yes, we have to start this process.'"
Parolin told AFP it was "premature" to talk about "detailed, concrete progress".
When asked about a possible visit to Vietnam by Pope Benedict XVI, he said it could not happen before 2010 at the earliest.
Parolin said the issue of seized church lands had been raised during the talks "in a general way".
Eight Catholics in December were given suspended jail terms and warnings for disturbing public order and damaging property in protest vigils over land disputes, including at the site of the former Vatican embassy in Hanoi.
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(Source: PRGN)