Seoul shares down; Hanwha, Daewoo up on deal drop news

*KOSPI falls 1.8 percent

*Banks retreat on restructuring cost worries

*KT, KTF jump after merger news

(Updates to midmorning)

By Jungyoun Park

SEOUL, Jan 21 (Reuters) - Seoul shares fell on Wednesday,
with banks hurt by worries about restructuring costs after they
decided to extend credit lines to troubled ship makers and
builders.

But the reported end of talks for a deal between Daewoo Ship
and Hanwha sent both companies' shares higher.

The Korea Composite Stock Price Index was down 1.75
percent at 1,107.04 points as of 0202 GMT, down 1.5 percent on
the year.

Shares in Daewoo Shipbuilding & Marine Engineering
(042660.KS) rose 5.88 percent and Hanwha Corp (000880.KS) stock
gained 3.31 percent after local media reported the Korea
Development Bank (KDB) had ended talks to sell a majority stake
in Daewoo Shipbuilding to South Korea's Hanwha Group amid
differences over financial terms. [ID:nSEO336166]

Banks' shares tumbled after they took the first step in a
corporate restructuring drive triggered by the impact of the
global downturn, unveiling the list of 14 builders and ship
makers under rescue plans, while cutting off credit lifelines for
two firms. [ID:nSEO343898]

"Worries about restructuring costs are deepening, as we will
actually see their results figures get quite ugly, as bad debts
are reflected in their earnings," said Ku Yong-uk, an analyst at
Daewoo Securities.

"Also, the fact of matter is, this is not the end, but only
the beginning of a restructuring process. We do not have clear a
idea about how much more losses are ahead.... That's why we are
seeing shares in banks with heavier exposure to the troubled
sectors falling more so than the others," Ku added.

A nearly 17 percent drop in S&P financial index .GSPF amid
fresh signs the global bank crisis is far from over following the
latest set of dismal results and outlook by global banks, also
added to pressure.

Hana Financial Group (086790.KS) lost 5.53 percent and Woori
Finance Holdings (053000.KS) fell 5 percent.

Meanwhile shares in KT Corp (030200.KS) and KTF Co Ltd
(032390.KS) rallied after South Korea's top fixed-line and
broadband firm said on Tuesday it would merge with its mobile
phone unit [ID:nSEO345491].

KT was up 7.3 percent and KTF advanced 6.02 percent.

"KT and KTF shares are up on merger news, and also on
expectations that the costs and share dilution may not be as bad
as some feared," said Oh Sung-kwon, an analyst at Kyobo
Securities.

KT said it will use its treasury stock holdings, worth 26
percent of the company, and issue new shares to finance the
merger.

"This merger will probably intensify competition in the
broader broadband and wireless telecommunications sector, and
marketing costs will likely rise again. Also this merger will
prompt SK Telecom (017670.KS) to push for a much-speculated
merger with SK Broadband (033630.KQ)," Oh added.

SK Telecom was up 0.96 percent and SK Broadband was up 1.94
percent, as the main index's fall fed an appetite for defensive
issues.

Meanwhile shares in KT&G (033780.KS) advanced 0.61 percent
after reporting a 82 percent jump in its fourth quarter net
profit.

(Editing by Ken Wills)