The Soviet delegate to the United Nations proposed a discussion of a cease-fire and an armistice in June 1951, and in July negotiations began between the United Nations and the communist commanders at Kaesŏng, later resumed at Panmunjom (both about 30 miles [50 km] northwest of Seoul). Many issues stood between the two negotiators. The first was the Chinese demand that all foreign troops be withdrawn from Korea, which was met by a steadfast refusal by the United States. The second issue was the boundary: the communists demanded the restoration of the 38th parallel, but the United States insisted on the existing battle line. The third and most important issue was that of prisoners. The UN forces held 171,000 prisoners, 50,000 of them unwilling to return to their communist countries. The communists, not to lose face, were determined to have all prisoners back. On this matter the negotiations were deadlocked and did not resume until after the death of Stalin in March 1953. A new U.S. administration under Pres. Dwight D. Eisenhower was inaugurated in early 1953 and, deeply concerned with balancing the U.S. budget, was determined to end the impasse, even if this involved resuming hostilities. On the other hand, the war-weariness of the communists was increasing. In April 6,670 communists and 684 UN personnel were exchanged at Panmunjom. The communists agreed to hand over to a neutral commission the UN-held prisoners of war who did not wish to be repatriated. But Syngman Rhee opposed any agreement that would leave Korea divided and demanded that the military offensive be resumed. In June Rhee suddenly released 27,000 North Korean anticommunist prisoners in defiance of the United Nations, whereupon the communists broke off negotiations. Negotiations were resumed one month later. Rhee acquiesced and agreed to support the armistice even though he would not sign it. In return, the United States promised to extend economic aid and conclude a mutual-security pact to protect South Korea against further aggression.

The armistice was signed on July 27, 1953. The United Nations had won most of its demands. The battle line became the boundary between North and South Korea, and a demilitarized zone (DMZ) was created by pulling back the respective forces 1.2 miles (2 km) along each side of the boundary. In addition, commissions were established to enforce the cease-fire regulations. A Neutral Nations Commission for Repatriation was entrusted with the repatriation of prisoners, 21,809 of whom—among them 7,582 Korean and 14,227 Chinese—chose to stay in South Korea or go to Taiwan.

The war had lasted for three years and one month and resulted in roughly 4,000,000 casualties, including civilians. South Korean casualties were some 1,313,000 (1,000,000 civilians); communist casualties were estimated at 2,500,000 (including 1,000,000 civilians). The United States lost about 37,000 in action (the official figure, which had been recorded as some 54,000, was revised in 2000 after it was discovered that a clerk had incorrectly included military noncombatant deaths worldwide), South Korea some 47,000, and the UN forces 3,194; but the estimated losses of China in action were 900,000 troops and of North Korea 520,000. During the war, two-fifths of Korea’s industrial facilities were destroyed and one-third of its homes devastated.

The U.S. Army had provided South Korea with $181.2 million during the occupation period of 1946–48. This money, which was provided under the assistance programs for occupied areas, was spent mainly on preventing hunger and disease. For the period 1949–52 the U.S. provided $485.6 million for economic aid and $12.5 million for military aid. Following the war, the UN Korean Reconstruction Agency was established to carry out economic aid to South Korea, with most of the contributions being provided by the United States. The agency came to an end in 1958, but UN Emergency Relief and aid from other international voluntary agencies continued.