CORRECTED - CORRECTED-UPDATE 3-S.Korea says banks having trouble raising dol

(Corrects name of bank and stock code in paragraph 10 to Woori Finance Holdings (053000.KS) from Woori Investment & Securities)

By Yoo Choonsik

SEOUL, Oct 6 (Reuters) - South Korea said on Monday its banks were having trouble raising foreign currency funds and tried to reassure markets spooked by the financial crisis sweeping the United States and Europe.

The Korean won KRW= fell 5 percent to its weakest since 2002 and the cost of borrowing on the money market surged. The Seoul stock market , tracking a Wall Street selloff on Friday, tumbled nearly 5 percent to a 20-month low.

U.S. lawmakers approved a $700 billion bailout plan for Wall Street banks saddled with bad mortgage debt last week, but South Korean Finance Minister Kang Man-soo said it would take a long time for the impact of that plan to be felt in emerging markets.

"Recently our financial institutions have begun experiencing troubles in securing foreign-exchange liquidity," Kang said at a meeting with executives from local commercial banks.

"The government judges that we need to deal with the situation preemptively, while assuming the worst-case scenario." He did not elaborate on what preemptive action might include.

Kang repeated an earlier government pledge to give banks access to the country's foreign exchange reserves, the world's sixth largest at nearly $240 billion.

Shares in South Korean banks fell in step with the broader market. The bank index .KS51 has fallen 25 percent this year, against a 29 percent loss in the broader market .

South Korea looks more vulnerable than many Asian nations to the credit squeeze triggered by U.S. mortgage default last year that has triggered bank failures and nationalisations in the United States and Europe.

Household debt hit 82 percent of gross domestic product and was 148 percent of disposable income and The bank loans-to-deposits ratio is at 139 percent after a lending spree between 2002 and 2007.

The loans-to-deposit ratio of the four biggest Korean banks -- Kookmin Bank 060000.KS, Woori Finance Holdings (053000.KS), Shinhan Financial Group (055550.KS) and Hana Financial Group (086790.KS) -- ranged between 135-177 percent in the first quarter of 2008, Moody's Investors Service said.

"The current difficulties are a result of the global liquidity squeeze rather than risk issues at individual banks," said spokesman You Jung-youn at Kookmin, the biggest lender.

"It is more about the country risk,"

The government has spent almost $25 billion since March to support the won, which has lost 26 percent since December and appears headed for its worst year since the 1997-1998 Asian financial crisis when capital fled the region.

Korea is also on track to post its first annual current account deficit since that crisis and foreign investors notched up net stock sales of 30 trillion won ($24.57 billion) this year, already the highest on record.

HEIGHTENED CREDIT DEFAULT RISK

But analysts said comparisons with the Asian financial crisis were overblown.

"It's different from the previous crisis because foreign reserves are now more than enough to cover short-term foreign debt," said Lim Ji-won, economist at JPMorgan Chase.

South Korean debt maturing in less than a year is worth about $210 billion.

Investor sentiment remained fragile.

The won, which suffered its worst month in a decade with a 10 percent slide in September, fell 4.9 percent on Monday to 1,286.9 from Thursday's domestic close KRW=KFTC of 1,223.5 per dollar. South Korean markets were closed Friday for a holiday.

In the local swap market, the cost of raising dollars for one-month rose to 7.0 won per dollar from around 5.0 won last week, dealers said.

The yield on the three-month certificates of deposit, one of the main tools for South Korean banks to raise short-term money, rose to the highest in 7-1/2-year high of 5.90 percent by the end of the morning session.

The cost of protection against a default on South Korea's five year sovereign debt remained little changed having surged six-fold this year to 240 basis points KOREA5UA=GFI. An investor would thus need to pay $240,000 a year to insure $10 million of South Korean bonds against default. (Additional reporting by Rhee So-eui in SEOUL and Rafael Nam in HONG KONG, Editing by Dayan Candappa)