Japan and South Korea are discussing a plan for a foundation funded by contributions from Korean companies to pay compensation for wartime labor to plaintiffs on behalf of Japanese corporate defendants, diplomatic sources said Sunday.

The planned compromise deal follows South Korean court orders for the liquidation of the local assets of Japanese companies to pay the damages. Japan maintains that all claims stemming from its colonial rule were settled "completely and finally" under a 1965 bilateral agreement.

The countries are aiming to settle the issue of the compensation, which has contributed to the deterioration of bilateral relations to the worst level in decades, by the end of this year, according to the sources.