By Choonsik Yoo
SEOUL (Reuters) - South Korea's top finance officials warned on Friday that tensions with North Korea could have a prolonged impact on markets and vowed to ensure stability, as the standoff threatened to put an additional drag on Asia's fourth-largest economy.
At an emergency meeting to tackle the effects of the crisis, they promised to take swift and strong action should the markets lose stability. Reports of another meeting with the central bank chief attending boosted investors' expectations of an interest rate cut next week.
The Seoul stock market's benchmark KOSPI <.ks11> fell 1.7 percent to a 2-month low by 3.33 a.m. British time while the won edged down 0.3 percent to a fresh 7-month low against the dollar as investors reduced holdings ahead of the weekend.
"In the past, (markets) recovered quickly from the impact from any North Korea-related event, but recent threats from North Korea are stronger and the impact may therefore not disappear quickly," Vice Finance Minister Choo Kyung-ho told the meeting.
North Korea threatened to strike U.S. military bases, including those on the American mainland, and to shut down a joint industrial complex with the South while denying entry to the complex by South Korean workers this week.
The new threats, though not unusual from the reclusive state, have been issued following the imposition of new U.N. sanctions in response to North Korea's third nuclear test in February. Up until now, reaction to them in markets has been muted.
The increasingly tense standoff with North Korea, which has said a nuclear war could break out at any time, could not happen at a worse time for the government of new President Park Geun-hye, whose first steps in office included a sharp cut in growth forecasts.
President Park, in office just over a month, has ordered her cabinet to draw up what is likely to be a large supplementary budget to lower budget revenue projections and add new spending plans aimed at jump-starting faltering domestic demand.
"The market usually doesn't get jittery over North Korea threats. But this time is different, because they look willing to sacrifice Kaesong, which has never happened before," said Park Hyung-joon, macroeconomics team leader at Meritz Securities.
POSSIBLE INTEREST RATE CUT
Expectation has been growing among investors that the central bank, the Bank of Korea, will lower interest rates at its April 11 policy meeting to boost corporate investment and consumer spending.
Those expectations were fuelled by local media reports that Governor Kim Choong-soo and Finance Minister Hyun Oh-seok were attending Friday's economic policy consultation meeting, alongside officials from the presidential office and the markets regulatory agency.
The Bank of Korea cut the policy interest rate by 25 basis points each in July and October last year, but has since left it unchanged at 2.75 percent, citing some signs of improvement in the advanced economies.
In a sign of increased worry over the latest tension, General Motors
"Anything that goes on in Korea is critically important to our global production," he said, adding in response to a question that it was fair to say further increases in tensions would prompt GM to look at moving production elsewhere long term.
(Additional reporting by Lim Seung-gyu, Hyunjoo Jin, Somang Yang; Editing by Ron Popeski & Kim Coghill)
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