Seoul shares down 2.6 pct led by banks, steelmakers

*KOSPI falls 2.6 percent

*Banks tumble on liquidity squeeze worries

*Steelmakers drop as economy worries darken sectoral outlook

(Updates to midmorning)

By Park Jung-youn

SEOUL, Oct 8 (Reuters) - Seoul shares fell on Wednesday after
Wall Street peers dived for a fifth straight session overnight on
worries the credit crisis would drag the economy into recession,
with higher oil adding to downward pressure.

Banks fell across the board, with Shinhan Financial Group
(055550.KS) down 4.64 percent and Hana Financial Group
(086790.KS) 4.44 percent lower.

"The credit market crisis is spreading to other regions
including Europe, the capital squeeze is deepening, and the won
currency is weakening further, and all these combined are dealing
a heavy blow to banks amid current market liquidity worries,"
said Ku Yong-uk, an analyst at Daewoo Securities.

Investors have to wait until the U.S. bailout money actually
finds its way into the markets and see how effective the bailout
is in quenching the thirst for capital in global markets, Ku
said, adding the question remains as to how long the banks can
withstand the pressure.

"But I can safely say, up until this point, that the
situation is far better than it had been during IMF crisis (Asian
currency crisis in 1997), since South Korea has ample foreign
currency reserves to meet the immediate demand for foreign
liquidity," Ku said.

The Korea Composite Stock Price Index was down 37
points at 1,329.31 points as of 0125 GMT, but up from the
session's low of 1,317.83 points.

The index has fallen just over 12 percent since late
September and is in sight of 1,300 points, a level it has not
crossed since mid-August 2006.

"Shares are going to trade lower today as the market lacks
any upward catalysts. Global central banks seem set to lower
benchmark interest rates, but the situation has deteriorated
beyond the level where it can be mended by monetary policy," said
Park So-yeon, market analyst at Korea Investment and Securities.

"There is an utter lack of trust in markets, and it will take
more time for them to function in a normalised way," Park said.

Shares in steelmakers also lost ground as anxiety that the
credit crisis would drag the economy into deep recession darkened
the sectoral outlook.

"As worries about the economy deepens, so are the concerns
about steel demand in the future. Also the weak won currency does
not bode well as it makes importing costs of raw material heavier
for steelmakers," said Kim Gyung-jung, an analyst at Samsung
Securities.

The South Korean won KRW= fell as much as 1.4 percent to
hit its weakest in seven and half years against the dollar on
Wednesday.[ID:nSEO345058]

Shares in POSCO (005490.KS), the world's No.4 steelmaker,
lost 4.01 percent and Hyundai Steel (004020.KS) was down 4.81
percent.

Oil refiners also dropped across the board as the weak won
and spectre of economic recession weighed on sentiment towards
the shares, sending SK Energy (096770.KS) down 4.85 percent and
GS Holdings (078930.KS) down 3.71 percent.

Technology issues were hit by worries about consumer and
business spending. Hynix Semiconductor (000660.KS) lost 3.38
percent and Samsung Electronics (005930.KS) eased 0.56 percent.

(Editing by Keiron Henderson)