Austria investigates yacht sale to North Korea's Kim

VIENNA (Reuters) - An Austrian businessman and Korean intermediary are being investigated over the sale of luxury yachts and cars apparently destined for North Korean leader Kim Jong-Il, prosecutors said on Friday.

Austrian prosecutors' spokesman Gerhard Jarosch said the deal involving two yachts, seven Mercedes saloons and some musical instruments violated U.N. sanctions against Kim's isolated Stalinist state imposed over its nuclear bomb tests.

Italy said on Tuesday it had broken up the sale with the help of Austrian investigators and seized two yachts meant for Kim. The status of the cars and instruments was unclear.

"An investigation has been launched against an Austrian businessman and a Korean middleman, who may be North Korean, over this illegal order. The offence is punishable by up two years in prison," Jarosch said.

He said the suspects were in Austria but not under arrest. He declined to say if they had been questioned, citing the confidentiality of an ongoing investigation.

Financial police in the central Italian city of Lucca said the yachts were worth nearly 13 million euros ($18 million) and had been bought by an Austrian from the Azimut-Benetti boatyard, one of the world's leading yachtmakers.

The Austrian then ceded the contract to a Chinese company, which in turn paid a Hong Kong business to take delivery of the vessels, Italian police said. Azimut-Benetti was not accused of wrongdoing and had cooperated fully in the investigation.

The sale of luxury goods to North Korea is banned under a U.N. resolution in retaliation for the country's nuclear testing program. The U.N. Security Council unanimously voted to widen its sanctions after North Korea's May 25 nuclear test.

Despite the poverty of his tightly controlled country, Kim is said by intelligence sources to live a life of extravagance. He reportedly uses yachts to host lavish receptions.

(Writing by Mark Heinrich; Editing by Alison Williams)