By Michele Kambas and Simon Bahceli

NICOSIA (Reuters) - Leaders of Cyprus's Greek and Turkish communities agreed on Friday to relaunch reunification talks and to open a barricaded street in Nicosia that symbolises the island's division.

It was the first meeting between Greek Cypriot leader Demetris Christofias and Turkish Cypriot leader Mehmet Ali Talat since Christofias was elected to the Cypriot presidency last month and raised hopes for reviving talks that are also crucial for Turkey's bid to join the European Union.

"The leaders have agreed to meet three months from now," said Michael Moller, the U.N. special representative in Cyprus, who hosted the meeting between the two men at a U.N. controlled territory splitting Nicosia, Cyprus's war-divided capital.

"The leaders have also agreed Ledra Street, as soon as technically possible, should open and function," he added.

Greek and Turkish Cypriots have lived separately since a Turkish invasion in 1974 in response to a brief Greek-inspired coup. Peace efforts collapsed in 2004 when Greek Cypriots rejected a U.N. reunification blueprint accepted by Turkish Cypriots, and soon afterwards joined the European Union alone.

The European Union welcomed the result. "I look forward to walking across the Green Line at Ledra Street myself in the near future," said Enlargement Commissioner Olli Rehn.

Analysts say this could be the last chance to end the division. Diplomats fear an enduring stalemate would entrench partition, harming Turkey's EU entry hopes and relations with NATO partner Greece.

Moller said the two sides had agreed to set up committees to discuss issues and the two leaders would meet in three months to examine progress and then start fully-fledged negotiations.

"It was the best possible result at this moment," said political analyst Yannis Papadakis. "They have agreed on the process. The opening of Ledra Street, which has been a trouble spot for many years, is very symbolic."

LEDRA OPENS

Ledra, a main shopping street in the heart of medieval Nicosia, has been barricaded for about half a century. The wall was torn down in recent years but the street remains blocked due to controversy over military patrols in the area.

Decaying buildings in the buffer zone must be shored up and the area swept for mines before it can open to the public, a process the United Nations say will take 10-15 days.

"It breaks my heart to see these crumbling buildings every day," said Chysanthos Trokkoudis, a merchant close to the barricade since 1959. "It's a good first step to open Ledra, it will help improve relations."

About 150 people gathered at the spot, with banners reading "Open up Ledra" and "End the division". A smaller group gathered on the Turkish Cypriot side 80 metres (yards) away.

"This barricade is a symbol of division. When it is open, it will be a symbol of peace. We want a united and independent Cyprus," said Salih Taskin, 48, a travel agent.

Christofias and Talat were upbeat. "I look forward ... to having in three months' time results which will help both of us have a dialogue under the auspices of the Secretary-General," Christofias told reporters. "We have to be optimistic anyway and we agreed that we shall work together in good will."

Former president Tassos Papadopoulos, defeated last month, made little progress towards reunification in talks with Talat. Christofias has maintained closer ties with Turkish Cypriots and, like Talat, has a background in leftist political activism.

"This is a new era we are starting for the solution of the Cyprus problem. Our target is to find a comprehensive solution to the Cyprus problem as soon as possible," Talat said.

The Greek Cypriots in the south represent Cyprus in the European Union and have the right to prevent Turkey from joining the bloc.

(Additional reporting by Stelios Orphanides, Writing by Dina Kyriakidou; Editing by Janet Lawrence)