The discussions, the first on the issue for 10 years, took place in the truce village of Panmunjom in the Demilitarized Zone that divides the two countries.
The two sides agreed to conduct a joint-study "at an early date" on modernizing the railways that run through their border, Yonhap quoted the South's Unification Ministry as saying.
A rail line that already exists from Seoul to Pyongyang was originally built by Japan in the early 20th century, long before the Korean War in 1950s.
Linking the two systems - and modernizing the North's ageing rail infrastructure - would give trade-dependent South Korea a land route to the markets of China, Russia and on to Europe.
But doing so would represent a fundamental change on the peninsula: there has been no direct civilian communication between the two Koreas since their division was sealed by the 1953 armistice that ended the Korean War.
Despite the diplomatic warming on the peninsula, with summits between the North's leader Kim Jong-un and both the South's President Moon Jae-in and Donald Trump of the US, Pyongyang remains under heavy sanctions over its nuclear and missile programs.
Any practical steps would only become possible after such measures are eased, South Korea's chief delegate Kim Jeong-ryeol acknowledged as he set off for the meeting.
"But we can thoroughly research and study various projects we can pursue after the sanctions are lifted," he added.
During an earlier period of rapprochement, the South built a gleaming station at Dorasan, just south of the Demilitarized Zone, with platforms marked for non-existent services to the North's capital.
On the eastern side of the peninsula, railways could connect South Korea's port city of Busan to Europe via the North and Russia.
Kim and Moon agreed to "adopt practical steps toward the connection" of the railways at their first summit in April. Moon has also shared his vision of linking the inter-Korean lines to trans-Siberian railways, offering a route to Europe, saying it would bring "huge economic benefits" to Seoul and Pyongyang as well as Russia.
The rapprochement on the Korean Peninsula was triggered earlier this year when Kim decided to send athletes, cheerleaders and his sister as an envoy to the Winter Olympic Games in the South.