Lifting the South's sanctions would have little effect since US -led worldwide sanctions remain.
Foreign Minister Kang Kyung-wha had said on Wednesday that Seoul was considering lifting measures applied after a deadly attack in 2010. While U.N. sanctions against North Korea don't ban tourism, they do place strict restrictions on the transfer of funds, he said. "They won't do it without our approval".
The ministry denied that Pompeo was angry and added, "The government held close consultations with the U.S.in all processes involving the signing of the inter-Korean military agreement".
And last Saturday, she told reporters in Seoul, according to Bloomberg: "The South Korean government's position on sanction exemptions is that we will request exemptions of sanctions to pursue various collaboration projects between North and South Korea".
A diplomatic source in Washington said, "Pompeo was informed of the terms to be agreed on during the inter-Korean summit and became very angry that he was not consulted in advance on issues that could have a major impact on the U.S".
At a parliamentary session in Seoul, Kang later watered down her statement, saying there are no full-fledged moves under way to remove the May 24 Measures.
The North Korean leader had told Mr Moon about his plan when the two met last month.
The young leader of the isolated, impoverished but nuclear-armed North has made a series of reconciliatory gestures this year, including a landmark summit with US President Donald Trump in June.
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Currently, tens of thousands of people are being detained in North Korean in labor camps for their religious beliefs and defection.
The agreement calls for the creation of buffer zones along the Koreas' land and sea boundaries and a no-fly zone above the border to prevent accidental clashes.
The Moon administration has sought exemptions from worldwide sanctions against North Korea to push forward cross-border exchanges this year amid a rapprochement in inter-Korean relations.
Despite the current mood of detente and negotiation between the Koreas, the removal of sanctions will be a hard decision for Seoul's government.
South Korea then effectively shut down all cross-border economic cooperation except for a jointly run factory park in the North Korean border town of Kaesong, which was shuttered in February 2016 after a North Korean nuclear test and long-range rocket launch. The move would be mostly symbolic since South Korea would still be required to follow United Nations sanctions, which cover much of the same areas.
During her conversation with lawmakers, Kang described Seoul's unilateral sanctions as a key obstacle in restarting South Korean tourism to the North's Diamond Mountain resort, which was suspended in 2008 following the shooting death of a South Korean woman there.
The May 24 measures include the South blocking North Korea's access to the Jeju Straight.
In her remarks to the Washington Post, Kang also differed with the U.S. view on the denuclearization process.
While some in the USA administration have indicated that denuclearization could be completed within the lifespan of the Trump administration, some experts say it could take more than a decade - assuming it is faithfully implemented, which many doubt.