NK Military put on Combat Alert Status

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SEOUL - North Korean leader Kim Jong-il has reportedly ordered his military to be on combat alert as tensions rise sharply on the peninsula after the South accused its neighbour of sinking a warship.

The report by the South’s Yonhap news agency immediately hit already nervous Seoul financial markets, with the main share index dropping more than three percent.

Yonhap quoted a local group of North Korea watchers as saying their sources there had told them Kim’s command had been broadcast by a top military official.

There was no reference to the order on North Korean media seen outside the reclusive state nor any immediate comment from South Korean officials.

Seoul on Monday announced it would ban all trade with the North and stop its commercial ships using South Korean waters, moves likely to further squeeze the already ruined North Korean economy.

Both sides have stepped up their angry rhetoric after international investigators late last week blamed the North for torpedoing the Cheonan corvette in March, killing 46 sailors in one of the deadliest clashes between the two since the 1950-53 Korean War.

The United States, which has 28,000 troops on the peninsula, threw its full support behind South Korea and said it was working hard to stop the escalation fury getting out of hand.

On the other side of the Cold War border, the North keeps about one million soldiers, one of the world’s largest standing armies,.

But they are poorly equipped and analysts say the North is unlikely to risk full scale combat against much better armed U.S. and South Korean troops.

South Korea is just as reluctant to go to war, aware it would send investors fleeing from Asia’s fourth largest economy.

Analysts say the main risk is that small skirmishes along the heavily armed border could turn into broader conflict.

The South’s financial markets are already jittery over the increasing angry war of words between the two Koreas, which still have not signed a peace treaty to formally end the Korean War.

"The Yonhap report, while still to be officially confirmed, chilled investor sentiment as it highlighted South Korea’s geopolitical risks. And timing for such news could not be worse, as market sentiment was already shaky with renewed euro zone financial fears," said Hwang Keum-dan, a market analyst at Samsung Securities.

"The stock market will have a hard time recovering until these two big uncertainties are somewhat resolved," she said.

South Korea’s won also extended losses, falling 4.5 percent to a 10-month low against the dollar, driven down by the combined euro zone and North Korea concerns.

The authorities were seen intervening to prevent too fast a drop.

U.N. SECURITY COUNCIL

South Korean President Lee Myung-bak said on Monday he would take the issue to the U.N. Security Council, whose past sanctions are already sapping what little energy North Korea’s communist economy has left.)

In what several diplomats in New York said was an unusual intervention in Security Council matters, U.N. Secretary General Ban Ki-moon expressed confidence the Council would take "appropriate" measures.

The United States, which backs Seoul, said the situation was "highly precarious" and it would take part in a joint naval exercise with the South.

China, the North’s only major ally, urged calm.

The Pentagon announced plans for a joint U.S.-South Korean anti-submarine drill "in the near future" and said talks were underway on joint maritime interdiction exercises.

Seoul believes a North Korean submarine infiltrated its waters and fired on the Cheonan.

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