North Korea said on Friday that impending military exercises by the South and the United States were pushing the region towards war, days after it launched its heaviest bombardment since the 1950-53 Korean War.
"The situation on the Korean Peninsula is inching closer to the brink of war due to the reckless plan of those trigger-happy elements to stage again war exercises targeted against the (North)," the North's official KCNA news agency said.
The aggressive language was typical for North Korean state-owned media but amid the heightened tension, it was enough to depress the won as much as 2.2%. The stock market closed 1.3% down.
There was brief panic in the capital Seoul in the afternoon when television reported sounds of artillery fire near Yeonpyeong, the island near the disputed maritime boundary which was shelled by the North on Tuesday.
But the military said the artillery fire was distant and no shells landed in South Korea. Yonhap news agency said it appeared to be a North Korean drill.
"Investors are growing more jittery ahead of the joint military exercise," said Kim Hyoung-ryoul, a market analyst at NH Investment & Securities. "The key concern is, whether North Korea will again take unforeseen, rash actions."
South Korean media said President Lee Myung-bak would name a career military man to replace the defence minister, who resigned after criticism that the government was too slow to respond to Tuesday's shelling. The government said it was still deciding.
The United States is sending in an aircraft carrier group led by the nuclear-powered USS George Washington to the Yellow Sea for the military exercises with the South Korean navy starting on Sunday.
Planned before this week's attack, the four-day maneuvers are a show of strength which, besides enraging North Korea, have already unsettled China, its major ally and neighbor.
Washington is pressing China to rein in its ally North Korea to help ease tension in the world's fastest-growing economic region.
Speak to Hu
US President Barack Obama is likely to speak with Chinese President Hu Jintao within days about the Korean situation, a White House official said, though no date had been.
But a Chinese foreign ministry spokesman said the focus should be placed on a revival of the stalled six-party talks grouping the two Koreas, Russia, China, Japan and the United States. He also expressed concern about the US-South Korea military exercises.
"We have noted the relevant reports and express our concern about this," spokesman Hong Lei said.
China has long propped up the Pyongyang leadership, worried that a collapse of North Korea could bring instability to its own borders. Beijing is also wary of a unified Korea that would be dominated by the United States.
Reclusive and unpredictable North Korea has defied international efforts to halt its nuclear ambitions. It fired shells at Yeonpyeong off the peninsula's west coast on Tuesday, killing two civilians and two soldiers and destroying dozens of houses.
The attack marked the first civilian deaths in an assault since the bombing of a South Korean airliner in 1987.
South Korean troops fired back 13 minutes later, causing unknown damage. Members of President Lee's own party and opposition lawmakers accused the military of responding too slowly.
Hundreds of former South Korean soldiers held a protest rally in the border town of Paju on Friday, accusing the government of being too weak.
"The lazy government's policies towards North Korea are too soft," said Kim Byeong-su, the president of the association of ex-marines.
"It needs to take revenge on a bunch of mad dogs. We need to show them South Korea is not to be played with."
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