The New York Times reports North Korea made the claim last week. But U.S. intelligence is still unsure if the North has gone ahead with the reprocessing of plutonium fuel rods to create new material for nuclear bombs.
If the North has done so, the Bush administration may have to consider military action to backup the president's vow that he would not tolerate nuclear weapons on the Korean peninsula.
The U.S. may also have to change its negotiating strategy, from insisting on multilateral talks to agreeing to the bilateral sessions North Korea has always sought.
But it's not clear just what North Korea has and what it intends to do with it, The Times reports. Pyongyang has made a series of threatening statements in public and private since the current nuclear dispute began in October.
In April at talks in Beijing, North Korean envoys told their American counterparts that North Korea already had nuclear weapons. The North repeated this claim to visiting U.S. lawmakers in June.
But that same month, North Korea said, first, that it had "intention to build up a nuclear deterrent force, then later admitted to a "nuclear weapons program."
Pyongyang's changing public posture complicated a murky intelligence picture. The CIA thinks North Korea might already have two nuclear bombs, but isn't sure, The Times said.
CIA satellites recently detected a new testing facility at Youngdoktong that may have been set up to test the type of conventional explosions that would trigger a nuclear explosion in a small warhead.
While North Korea has never tested a nuclear device, conventional explosions resembling nuclear blasts have occurred at the site.
Last week, South Korea's National Intelligence Service, or NIS, said the communist North had reprocessed a small number of 8,000 spent nuclear fuel rods that were stored at its nuclear facilities at Yongbyon.
In trying to verify whether North Korea was reprocessing the rods, the U.S. has tested the atmosphere above the Yongbyon plant for gas released during reprocessing. The results were inconclusive. More tests are scheduled.
For American intelligence, the challenge comes as doubts persist about prewar reports of Iraq's alleged illegal arsenal.
The North Korean situation is "the mirror image of the Iraq problem," one official told The Times. "We spent years looking for evidence Iraq was lying when it said it didn't have a nuclear program. Now North Korea says it's about to go nuclear, and everyone is trying to figure out whether they've finally done it, or if it's the big lie."
Meanwhile, China appealed Tuesday for dialogue to resolve the nuclear standoff with North Korea.
On Monday, an envoy of Chinese President Hu Jintao reportedly urged North Korean leader Kim Jong Il to accept U.S.-proposed talks aimed at resolving the nine-month-old crisis.
China also said the security concerns of North Korea, which fears a U.S. attack, were "rational" and must be resolved. The comment appeared to be part of an effort to fashion a compromise between Washington and Pyongyang.
China's role is pivotal because it exerts considerable leverage over the North as a major source of food and fuel to its impoverished neighbor. At the same time, China is sharply critical of U.S. proposals for economic and political pressure on North Korea.
"We maintain that the nuclear issue must be resolved peacefully and the rational security concerns of the DPRK must be addressed," said China's Foreign Ministry spokesman Kong Quan.
The nuclear standoff flared last October when U.S. officials said Pyongyang admitted having a secret nuclear program in violation of a 1994 pact with Washington. That led the U.S. to suspend fuel shipments to North Korea, and Pyongyang retaliated by throwing out international nuclear monitors.