Q+A: What are the next steps on N.Korea and how will it react?

A North Korean Soldier looks in through the window of the T2 building as U.S. Secretary of State Hillary Clinton and U.S. Defense Secretary Robert Gate tour the Demilitarized Zone (DMZ) in Panmunjom, South Korea, July 21, 2010.

SEOUL (Reuters) - The United States is expected to announce details of new sanctions imposed on North Korea in the next two weeks, a U.S. official said, aimed at punishing Pyongyang for the sinking of a South Korean ship.

Following are some of the measures that the United States and South Korea could take, and what the North may do in response.

WHAT WILL NEW U.S. SANCTIONS DO?

The sanctions will target individuals and entities to freeze their assets in the United States, stop trading companies from doing business in third countries allied to the U.S. and prevent banks from handling those companies' transactions.

There will also be measures to stop travel for individuals who are identified as being involved in illicit activities.

The steps are aimed at cutting the flow of money to the country, further debilitating its already broken economy. They will also make life more difficult for leader Kim Jong-il, his family and aides, by cutting off cash and luxury goods.

HOW WILL NORTH KOREA REACT?

Very angrily. North Korea slammed the brakes on disarmament talks in 2005 after the U.S. Treasury Department moved to freeze North Korean accounts at Macau's Banco Delta Asia, accusing it of being used for money laundering. The boycott of the six-party talks went on for more than a year, culminating in frantic U.S. actions to release the funds to resolve the issue so that the regional powers could move on with ending the North's nuclear programme.

Analysts said the roughly $24 million frozen at the Macau bank personally belonged to leader Kim Jong-il, whose son was a resident of Macau, which was the reason the North was extremely keen on getting it back before returning to talks.

Further provocations are possible, especially as the North tries to build political support for succession of power to Kim Jong-il's son. U.S. President Barack Obama's pick to be the top intelligence official, James Clapper, said a dangerous new phase may be starting where the North will try to use aggression to advance its political goals.

WHAT IS SOUTH KOREA GOING TO DO?

The government of President Lee Myung-bak may be more open to dialogue with the North than the United States. Lee is passing the half-way point of his single term without much to show in accomplishment.

Some analysts say Lee will take the ship incident not as a chance to further toughen his policy but instead to moderate it and find a way to begin dialogue with Pyongyang.

ARE THE SIX-PARTY TALKS A POSSIBILITY

There was no reference at all to the six-party talks in the joint statement issued by the foreign and defense ministers of South Korea and the United States when they met on Wednesday. The talks are unlikely to be an option until some form of gesture from the North about the sinking of the South Korean navy ship.

WHAT DO MARKET PLAYERS LOOK FOR?

Possibility of an armed conflict. South Korea's President Lee is mindful of how any development would impact its own economy and pose risks to its powerful neighbors in North Asia. A skirmish, like the deadly gunfights in disputed waters off the west coast in 1999 and 2002, or along the military border has the potential to flare up into a greater conflict.

The greatest risk to investors would be if Seoul, or any regional power, miscalculates the propensity of Pyongyang to take differences to the brink.