Mass protests in South Korea; cabinet offers to quit

* Tens of thousands protest in Seoul

* President could start cabinet reshuffle this week

* Inflation fears move markets, politics hurt sentiment

By Jon Herskovitz and Yoo Choonsik

SEOUL, June 10 (Reuters) - South Korea's entire cabinet offered to resign on Tuesday in the face of massive street protests, as its increasingly unpopular president warned that Asia's fourth-largest economy could be heading into crisis.

The protests against the government, in office barely three months, were sparked by public outcry over a deal to widen its market to U.S. beef imports and have cast a darkening cloud over President Lee Myung-bak's plans for sweeping reform.

"The prime minister offered the cabinet's resignation at the regular meeting this morning (with Lee)," a spokeswoman at the prime minister's office said, in what local media said was a response to the mounting anti-government protests.

Tens of thousands of protesters chanting "Lee Myung-bak go away" clogged the streets of central Seoul in a candle-light rally attended by mothers toting children, radical labour groups, office workers and college students.

Police sealed off roads in the capital, stacking sand-filled shipping containers to block the main street leading to the presidential Blue House and deployed high-pressure water cannons to disperse any violent protesters.

Organisers said 700,000 gathered in Seoul for the largest anti-Lee rally to date. Police put the number at 80,000 while some local media estimated the crowd at 200,000 to 400,000.

"I want to denounce not only the beef deal, but the other policies of the Lee Myung-bak government. I'm just one person, but I think the president will listen to me when I speak loudly with so many others," said protester Sang Mi-ra.

ECONOMIC ROUGH PATCH

Lee warned that surging resource prices and slowing growth were pushing the economy towards its roughest patch in a decade.

"Our economy is faced with a serious difficulty, with prices rising and the economy gradually slowing," Lee said in a speech to mark the 21st anniversary of pro-democracy protests that helped end years of autocratic rule in South Korea.

Shortly after he spoke, the government announced that producer price inflation in the world's fifth largest crude oil importer had hit a near 10-year high last month.

The data makes it even more likely the central bank will keep interest rates on hold at its monthly meeting on Thursday despite recent pressure from the government to relax monetary policy to spur slowing domestic demand.

Inflation fears have hit local financial markets and on Tuesday forced the authorities to sell dollars to prop up the weakening won. Bonds prices also fell and the political unrest was cited as a factor is pressing down share prices.

Lee's promise of 6 percent growth this year now looks out of reach and many economists doubt it will even match last year's 5 percent rise because of the impact of slowing economic growth and surging inflation around the world.

RESHUFFLE

Local media said Lee would start a government reshuffle later this week and speculated the conservative former CEO would ditch his farm, health and education ministers, along with several aides, and possibly the foreign and finance ministers.

The April beef deal with the United States was meant to help a separate bilateral free trade accord that U.S. congressional leaders threatened to block unless South Korea opened up its market to beef imports.

But widespread concern over mad-cow disease in U.S. beef quickly turned the issue into a lightning rod for a broad range of grievances against Lee's government that the public increasingly sees as out of touch with its concerns.

Lee won December's presidential election over an unpopular liberal foe by a landslide, largely on his pledge to bring high growth back to South Korea's export-dependent economy.

"His path to the presidency was too easy. He felt he could do no wrong and this created arrogance and confidence that made it difficult for him to see the political landscape," Kang Won-taek, a professor in political science at Soongsil University, said.

Truck drivers, following the lead of unions in a number of countries across Asia and Europe, voted on Monday to go on strike over rising fuel prices. They ignored the government's $10.2 billion financial aid package announced a day before and designed in part to cushion the impact of mounting energy costs.

Other unions also voted on whether to strike and slow down production at auto plants and other factories.

The growing political storm has all but blocked the government's plans for major economic reform, including tax cuts, mass privatisation of major state-run firms and banks and efforts to make the country more accessible to foreign investment.

The new conservative-dominated parliament has been unable to sit because the opposition has boycotted its opening.

"The current crisis signifies a deeper public malaise in Korea, risking to dampen economic growth over the coming year," said Hong Kong-based HSBC Asia economist Frederic Neumann.

"The second big worry is that consumer and business sentiment takes another hit, thus depressing domestic demand at a time when exports could show signs of buckling." (Additional reporting by Rhee So-eui and Park Ju-min, Writing by Jonathan Thatcher; Editing by Jeremy Laurence)