By Cynthia Kim

SEOUL (Reuters) - South Korea said on Friday said it has agreed with China to extend a currency swap deal between the countries' central banks, a decision that points to an easing of diplomatic tensions with Beijing over security issues.

The $56 billion currency swap, which was due to have expired on Tuesday will, be extended for another three years, according to South Korea's finance ministry and the Bank of Korea.

A BOK official told Reuters on Friday the agreement was struck on Tuesday, ahead of the expiration, and that the extension commenced on Wednesday.

Some investors had earlier speculated that both countries might fail to sign an renewal ahead of the deadline due to political tensions over South Korea's decision to host the Terminal High Altitude Area Defense (THAAD).

Analysts say China's nod to extend the currency swap deal with South Korea is a sign the chill between the two economies is thawing.

Beijing had been unofficially restricting trade and tourism with South Korea in response to Seoul's decision to deploy a U.S. anti-missile defense system.

South Korea's decision to host the THAAD has drawn fierce criticism from China, which says the system's powerful radar can probe deep into its territory.

Lee Sang-jae, an economist at Eugene Investment & Securities, said the decision over currency swaps shows Beijing won't be burning bridges with Seoul, even if China maintains longer-term criticism against THAAD.

"It shows China's may not extend the ongoing boycotts to its economic policies with South Korea. There will still be tensions, but them agreeing to extend the deal is a good news for Seoul," Lee said.

The swap ensures both central banks have access to large amounts of each other's currency should extra liquidity be needed at short notice.

(Reporting by Cynthia Kim; Editing by Kim Coghill and Sam Holmes)