WRAPUP 3-S.Korea plays down crisis as won hits 7-1/2-year low

* President says no need for pessimism over economy

* Ministers meet on economy

* Won falls to lowest since early 2001 (Updates markets, poll, comments by banker and analyst)

By Cheon Jong-woo

SEOUL, Oct 7 (Reuters) - South Korea's president dismissed talk of a repeat of the currency crisis that nearly broke the economy 10 years ago, trying to calm investors as the won hit a 7-1/2-year low on fears global financial turmoil might drag down the country's banks.

But in a sign of mounting concern, top economic ministers and the head of the central bank met to discuss the financial upheaval that began with the U.S. housing market and now threatens lenders around the world, with those in South Korea joining the ranks of those seen as most vulnerable.

President Lee Myung-bak has already called for a summit with China and Japan on the crisis and his finance minister has urged local banks to sell foreign assets to raise the dollars that other banks were unwilling to lend them. [ID:nSEO335854]

"The current crisis situation is different from that in 1997," Yonhap news agency quoted Lee as saying during a scheduled cabinet meeting.

"We don't have to be overly optimistic, we don't need to be pessimistic and caught up in a fear of crisis," said Lee.

South Korea only escaped sovereign default in the 1997/98 Asian financial crisis with an international rescue package worth close to $60 billion led by the International Monetary Fund.

An official at Kookmin Bank 060000.KS, the country's top lender, said a dollar shortage in the local market was not as severe as the market feared.

But he added: "If current global liquidity problems continue, it could hit the corporate sector as banks will rein in lending to the sector due to dollar shortages."

In one move to counter the foreign currency squeeze, state-run Korea Development Bank (KDB) said it planned to borrow up to $4 billion by the end of the year.

Concerns over South Korea's financial sector mounted this week as the country said its banks were having trouble raising foreign currency funds, with foreign capital fleeing the country.

Standard & Poor's Ratings Services said on Tuesday pressure from the global liquidity squeeze threatened to negatively affect the credit quality of Korean banks, mainly due to their ongoing foreign currency funding needs. [ID:nWLB2080]

Banks' foreign currency funding has more than doubled to $127 billion as of end-June 2008 since the end of 2005, it said.

FAILED TO DISPEL FEAR

The latest official comments have failed to dispel market fears that the global credit crunch, which has seen banks withdraw from short-term lending markets, will bite South Korea's financial industry especially hard because of high levels of household and small-company debt.

An opinion poll by P&P Research Group showed that only 26.5 percent of those asked thought Lee's government was coping well with the crisis.

"The current administration is under a lot of pressure. It came to power because people thought it would help make the economy be better off, but now things are going bad these days. He (Lee) cannot keep his promises," Yun Chang-hyun, professor of finance at the University of Seoul, said.

Lee's ambitious promises when he took office in February to revamp the South Korean economy have been repeatedly knocked off course, first by domestic opposition and now, the international financial woes.

Highlighting the growing unease, the won slumped close to 6 percent against the dollar on Tuesday to hit its lowest level since April 2001, adding to Monday's 5 percent slide on Monday.

The currency is the worst performer this year, by far, among 10 Asian currencies tracked by Reuters News and was quoted around 1,328.4 at 0600 GMT, after having slid to as low as 1,345.8. It has dropped a third so far this year.

Deputy Finance Minister Shin Je-yoon predicted the won would start to stabilise as the current account, which showed a record deficit in August largely due to high imported commodity prices, moves into surplus this month.

The crisis has also taken its toll on the stock market. By the close of trading, though, the main index .KS11 had recovered all the day's earlier losses. But it was still close to a two-year low and down almost 30 percent so far this year. LINKS > FACTBOX on currency assets of S.Korean banks.[ID:nSEO335854] > Full coverage of the global credit crisis........[ID:nCRISI] (Additional reporting by Seo Eun-kyung, Park Jung-youn, Yoo Choonsik, Writing by Jonathan Thatcher, Editing by Jacqueline Wong)