South Korea rules out navy ship sunk by North Korea

BAENGNYEONGDO, South Korea (Reuters) - South Korea on Saturday all but ruled out the chance that North Korea was involved in the sinking of one of its navy vessels near their disputed border.

Initial speculation that North Korea might have sunk the ship had spooked Wall Street on Friday. Share prices dipped partly on geopolitical concerns, and the won dropped against the dollar.

"Given the investigations by government ministries so far, it is the government's judgment that the incident was not caused by North Korea, although the reason for the accident has not been determined yet," a senior government official was quoted as saying by Yonhap news agency.

A Reuters reporter on Baengnyeongdo island near where the ship sank said about 10 navy and coastguard vessels, along with divers, were searching the area and the wreckage.

MBC television quoted defense ministry sources as saying they were investigating whether it was the result of an explosion on board the vessel.

Presidential Blue House spokeswoman Kim Eun-hye earlier said there had been no unusual movements by North Korea, which has a million-strong military, much of it near the heavily armed border that has divided the Korean peninsula for more than half a century.

"UNIDENTIFIED REASON"

The defense ministry said 58 of the 104 crew on board had been rescued and Yonhap quoted navy officials as saying several had died. It was later quoted as saying 46 were still missing.

"An unidentified reason caused a hole in the ship, which led to its sinking. Rescue efforts are under way," the ministry said.

"The ship fired a warning shot at an unidentified object, and the object was later suspected to have been a flock of birds. But we are checking," it said.

Earlier, South Korean media had quoted officials as saying the North could have torpedoed the ship. One said it could have struck a mine.

"The loud firing sound remained for about 15 minutes, while I watched TV. I never heard such loud firing sound in my entire life staying at (the) island, and the sound was definitely different from those heard from usual drills," Yonhap news agency quoted one 56-year-old resident on a nearby island as saying.

MBC TV said it could take up to 20 days to raise the 1,200-tonne ship. It sank in waters 15-20 meters deep.

The sinking occurred as the impoverished North has grown increasingly frustrated by its wealthy neighbor, which has given the cold shoulder to recent attempts to reopen a lucrative tourist business on the northern side of the frontier.

It also coincides with mounting pressure on Pyongyang to end a more than one-year boycott of international talks to end its efforts to build a nuclear arsenal.

There have been concerns that the North might resort to military grandstanding, a tactic it has often used in the past when it is gearing up for negotiations with the outside world.

Reports of a possible naval clash saw the won weaken roughly 0.45 percent against the dollar and were cited by analysts as one reason for a dip in U.S. stocks.

Markets have become largely inured to saber-rattling by North Korea but it has in the past caused brief jitters that were quickly reversed.

The ship sank near the disputed Yellow Sea border off the west coast of the peninsula, which was the scene of two deadly naval fights between the rival Koreas in the past decade.

Navies from the rival Koreas exchanged gunfire for the first time in seven years in the Yellow Sea in November, damaging vessels on both sides.

(Additional reporting by Cho Mee-young, Cheon Jong-woo, Kim Miyoung, Jon Herskovitz and Jonathan Thatcher; Writing by Jonathan Thatcher; Editing by Paul Tait)