South Korea ship sinking may be North's grandstanding

SEOUL (Reuters) - A South Korean naval ship was sinking near the maritime border with the North on Friday after possibly being hit by a torpedo and several sailors were killed, South Korean media reported.

The Seoul government has called an emergency meeting of senior cabinet ministers.

Here are some implications of the incident and how a possible North Korean attack would impact regional security and sputtering talks to end Pyongyang's nuclear arms ambitions.

* The North will not escalate tensions to the state of war, which would be a suicidal move for leader Kim Jong-il because his ill-equipped army would be no match for the advanced militaries of South Korea and its biggest ally the United States.

* If the North did attack the South's ship, the likely reason would have been to raise tension ahead of its return to the nuclear talks. The North often rattles sabers ahead of major diplomatic meetings to alarm its dialogue partners in the hope that they would be more willing to make concessions in return for Pyongyang reducing its military threat to the region.

* Military grandstanding by the North usually only has a temporary impact on markets, with investors saying it would take the threat of war to cause real and lasting impact.

* North Korea risks further hits to its economy by an attack on the South. Its nearly bare coffers have been further depleted by U.N. sanctions imposed after a nuclear test in May while a botched currency revaluation at the end of last year added to its woes and sparked rare civil unrest.

* A North Korean attack on the South strengthens Kim's standing at home among the country's powerful military. This could help him reshuffle cadres or perhaps clear the way for his youngest son to be named heir of the communist dynasty when the North's parliament holds its annual meeting on April 9.

* The North may follow the attack with other sorts of military grandstanding that could include missile launches or even another nuclear test.

* If Pyongyang goes too far, it could be hit by U.S. Treasury measures that would virtually cut off its meager international finances. This would deal a major blow to Kim who needs hard cash to win the support of cadres for his succession plans and to pay for an ambitious program lauded in his state's media to build a "strong and prosperous" nation by 2012.

(Editing by Raju Gopalakrishnan)