WRAPUP 3-S.Korea won at lowest since Asia financial crisis

* Won at lowest level against the dollar in 10 years

* Analysts predict further falls in the currency

* Stocks drop to lowest level since 2006 (Updates markets, adds presidential aide's comments)

By Cheon-jong-woo and Park Jung-youn

SEOUL, Oct 8 (Reuters) - South Korea's currency fell to its lowest since the Asian financial crisis a decade ago on fears the region's fourth-largest economy could buckle in the turmoil tearing through global markets.

Officials insisted there was no risk of banks or companies going under and that the government was ready to dip into its vast foreign exchange reserves -- the world's sixth largest at $240 billion -- to make sure there were enough dollars in the local market.

Reiterating the message, President Lee Myung-bak cited strong economic fundamentals and argued the region's main economies had more money to mount a defence against a global crisis that has toppled banks in the United States and Europe.

"A financial crisis that started in the United States is hitting Europe hard and is feared to travel to Asia," a statement from the presidential office quoted him as saying.

"But the three countries of China, Japan and South Korea have nearly $1.8 trillion of foreign reserves.... (they) will not suffer a direct crisis such as the one Europe faces," he added.

Lee this week called for a summit with leaders of the three countries later this month in Beijing.

The former businessman insisted there was no comparison between the current market slump and when South Korea came close to sovereign default in the 1997/98 Asian financial crisis [ID:nSEO87717].

However, investors remain unconvinced and analysts said that as the global financial crisis continues to hammer South Korea, the currency will add to its losses against the dollar which already amount to 30 percent so far this year.

"Further losses cannot be ruled out," said Patrick Bennett, strategist at Societe Generale in Singapore. "Portfolio flows are coming out of the market and the level of offshore borrowing by the bank sector remains a risk investors are unwilling to accept - despite the still high level of FX reserves."

The currency KRW= slumped as much as 5 percent on Wednesday to 1,398 per dollar, its lowest level since South Korea began to emerge from the ravages of Asia's financial meltdown a decade ago. It later edged back up slightly.

Its plight means the central bank will likely keep interest rates on hold at its monthly meeting on Thursday despite the risk to growth posed by the global credit crisis, analysts said.

This week alone the currency has skidded more than 12 percent as investors fretted over a global credit crisis that has starved the country's banks of dollars and fuelled the worst capital flight from South Korea since the collapse of Asia's markets a decade ago.

Outstanding short-term external debt is equivalent to 18 pct of last year's annual GDP, compared with 11 percent in 1997. But as a percentage of currency reserves the contrast is sharp -- 73 percent now versus 719 percent in 1997.

The won is Asia's worst-performing currency among those monitored daily by Reuters News, having dropped 30 percent this year in a global crisis that began in the United States and which has ricocheted across markets from London to Reykjavik.

SQUEEZE

The conservative former CEO, who took office in February with a promise of sweeping economic reforms, has struggled to convince South Koreans he can handle the latest onslaught against the currency.

"They (the government) need to drop the arrogance that they know about the economy," the Dong-a Ilbo said in an editorial earlier this week, referring to comments by Lee and his finance minister that the economy would be spared the global crunch.

"Careless predictions are worse than none at all."

The tight liquidity in South Korea's banking sector would last until the end of the year, a senior official at state-run Korea Development Bank (KDB) said. He declined to be identified because of the sensitivity of the issue.

His bank plans to raise up to $4 billion from loans, short-term borrowing and private bond deals to help cover an increasingly painful squeeze on foreign currency liquidity in the domestic market. [ID:nSEO80762]

The government has encouraged state banks to raise funds to help ease pressure on commercial banks less able to access funds abroad and because of concerns they could face a struggle to roll over foreign debt payments.

But an official in charge of foreign financing at the country's largest lender, Kookmin Bank 060000.KS, told Reuters on Tuesday that the dollar shortage was not as severe as the market feared. He also declined to be identified because of the sensitivity of the issue.

Reflecting a global assets sell off, the main Seoul stocks index slumped.

The main index dropped almost 6 percent, closing below 1,300 for the first time since August 2006. Taking its cue from big falls on Wall St, it has fallen 14 percent since late September.

Other stocks markets in Asia are falling sharply. Tokyo's Nikkei average .N225 closed down 9.4 percent on the day.

The won's fall could put more pressure on the economy. Core inflation, which strips out food and oil prices, is already running at a 10-year high of 5.1 percent and the government and central bank expects the current account to swing this year to its first deficit since the Asian financial crisis.

"The impact will be biggest on local inflation, importers and companies with heavy foreign-currency debt. But in general, this fast drop in the won will be very negative to the whole economy," said Lee Sung-kwon, chief economist at Goodmorning Shinhan Securities. (Additional reporting by Yoo Choonsik, Writing by Jonathan Thatcher; Editing by Neil Fullick)