Seoul shares drop 8 pct to lowest since July 2005

*KOSPI falls to 40-month low

*KOSPI down 8 pct, on course for 4th biggest loss ever

*Exporters lead loss as econ fears deepen

*Junior Kosdaq hits all time low

(Updates to midmorning)

By Park Jung-youn

SEOUL, Oct 23 (Reuters) - Seoul shares dived 8 percent to a
40-month low on Thursday as fears of worldwide recession deepened
after a raft of poor U.S earnings and grim outlooks, sending
major exporting issues tumbling.

The Korea Composite Stock Price Index was down 7.8
percent to 1,046.55 points as of 0119 GMT, the lowest since
mid-July 2005. The junior Kosdaq market .KQ11 took a similar
beating, falling 7.97 percent to its all time low of 309.73.

Fears that recession and job losses in South Korea's major
markets will cut demand for its goods were being reflected in the
day's losses, analysts said.

"After a raft of U.S. earnings came out dismally, companies
are set to cut costs, mostly by laying off a significant portion
of their employees. Worry about massive unemployment and its
impact on the real economy is deepening,' said Kim June-kie, a
market analyst at SK Securities.

He added that as companies increasingly seek to retain safer
assets -- such as the U.S. currency and treasuries -- assets
linked to emerging economies are being sold heavily.

The index, which has fallen 45 percent so far this year, is
potentially on course to post its fourth-largest daily percentage
loss after the third-worst loss of 9.44 percent on Oct, 16.

The Korea Exchange temporarily halted programme trading on
its main board due to volatile futures prices for five minutes
from 0048 GMT, its 10th such volatility-taming measure this year.

Foreign investors were sellers of a net 13.3 billion won
($9.77 million) worth of shares on the mainboard as of 0040 GMT,
while domestic institutions were selling a net 86.8 billion won.

Foreign ownership in KOSPI fell to 29.5 percent from the
yearend 2007's 32.39 percent, according to the Korea Exchange.

"South Korea needs to be seen as a stable economy to contain
persistent foreign selling, and in order for that, we absolutely
need stabilisation in our foreign exchange markets. A volatile
won points to vulnerability of our financial markets and the
economy, as we rely heavily on imports for our raw material
needs," Kim added.

Losses were led by exporters and heavy industry issues as
global recession fears deepened by the day in global markets,
with U.S. stocks ending at their 5-year lows on Wednesday.

Samsung Electronics (005930.KS), the world's No.1 memory chip
maker, tumbled 8.27 percent, and POSCO (005490.KS), the world's
No.4 steelmaker, lost 8.45 percent.

Hynix Semiconductor (000660.KS), the world's No.2 memory chip
maker, was down 9.02 percent, and LG Electronics (066570.KS), the
world's No.4 cellphone maker, was down 8.18 percent.

But Hyundai Motor (005380.KS), South Korea's top auto maker,
fractionally outperformed against the broader market ahead of its
earnings announcement set to come out later on Thursday, trading
percent 6 lower.

(Editing by Keiron Henderson)