WRAPUP 6-Two Koreas snarl at each other, tensions rise

* South to take North to U.N. Security Council

* China urges calm

* Markets nervous but recover a bit after Lee’s speech

* U.S. urges China to pressure the North, backs South

* North Korea say it will shoot at South’s equipment
(Recasts, adds China comments)

By Jack Kim and Arshad Mohammed

SEOUL/BEIJING, May 24 (BestGrowthStock) – South Korea on Monday
announced steps to tighten the vice on the North’s already
stumbling economy in punishment for sinking one of its navy
ships, with both sides stepping up their war-like rhetoric.

The United States, which backs Seoul, warned that the
situation was “highly precarious”. [ID:nTOE64N05Y]

China, the North’s only major ally, urged calm.
[nTOE64N07Y]

The mounting tension follows last week’s report by
international investigators accusing the North of 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 situation from escalating.

With U.S. Secretary of State Hillary Clinton in Beijing,
Washington pressed China to rein in the hermit state.

China has avoided taking sides in the issue. Analysts say
it is fearful of destablising the grip of North Korean leader
Kim Jong-il, who is looking increasingly frail as he tries to
secure the position of his youngest son as successor to the
family dynasty that has ruled the state for more than 60 years.

The vitriolic comments across the heavily defended Cold War
border are rattling investors and niggling at diplomatic
relations in the economically powerful region.

Few analysts believe either Korea would dare go to war. The
North’s military is no match for the technically superior South
Korean and U.S. forces. And for the South, conflict would put
investors to flight.

(For a Q+A on the crisis click [ID:nTOE64M02F])

“I solemnly urge the authorities of North Korea … to
apologise immediately to the Republic of Korea (South Korea)
and the international community,” South Korean President Lee
Myung-bak said in a nationally televised address.

Lee said he would take the issue to the U.N. Security
Council, whose past sanctions are already sapping what little
energy North Korea’s economy has left.

His government also banned all trade, investment and visits
with North Korea and stopped its commercial shipping using a
cheaper route through its waters. [ID:nSUL000054]

(For a factbox on the measures, click [ID:nSGE64N1OE]

WHITE HOUSE BACKING

The White House called South Korea’s measures to punish the
North entirely appropriate and told Pyongyang to stop its
“belligerent and threatening behaviour” as tensions on the
peninsula escalated to their highest in years. [ID:nN24237740]

But Clinton avoided answering a question on whether
Washington would support additional U.N. sanctions against
North Korea. China is very unlikely to support more U.N.
sanctions.

Japan’s prime minister instructed his cabinet to consider
what form of sanctions could be taken against North Korea over
the sinking.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For complete North Korea coverage, click [ID:nNORKOR]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

An angry North Korea threatened to fire at equipment the
South said it would put up to broadcast anti-Pyongyang messages
and was ready to take stronger measures if the South escalated
tension. [ID:nTOE64N04U].

It also issued a statement repeating its position that it
had the right to expand its nuclear deterrent. [ID:nSEW002194]

“North Korea’s goal is to instigate division and conflict,”
said Lee, speaking from the country’s war memorial in the
capital Seoul. “It is now time for the North Korean regime to
change.”

In what may alarm Pyongyang as much as anything, its
wealthy neighbour said it plans to reduce the number of workers
in a joint factory park just inside the North which has long
been an important source of income for the North Korean
leadership.

FOCUS ON CHINA

Much of the diplomatic focus will be on China, the only
major power to support North Korea and which earlier this month
— to the annoyance of the South — hosted a rare overseas
visit by the North’s sickly looking leader Kim Jong-il.

Analysts say China’s leaders are terrified that if North
Korea’s government collapses, it will send chaos across into
its territory and, perhaps more worrying, lead to U.S. troops
moving up the peninsula right to its border.

A South Korean government report said the North’s foreign
sanctions-hit trade fell 10 percent last year and could fall
further this year, forcing it to depend even more on China to
prop up its economy.

Lee said the South reserved the right to defend itself if
Pyongyang wages aggression. The North said much the same to its
neighbour last week when it denied involvement in the sinking.

Local financial markets took some relief from Lee’s
comments which steered clear of any suggestion of military
retaliation.

“South, North tension is certainly not positive, but given
historical trends, losses that markets suffer over this will be
brief, unless a drastic situation takes hold. By drastic, I
mean war. I do not think war is likely though,” said Kwak
Joong-bo, a market analyst at Hana Daetoo Securities.

Stock  Money

(Additional reporting by Jungyoun Park and Yoo Choonsik in
Seoul, Jeff Mason in Washington; Writing by Jonathan Thatcher;
Editing by Jeremy Laurence)

WRAPUP 6-Two Koreas snarl at each other, tensions rise