SEOUL/BEIJING (Reuters) - South Korea on Monday announced steps to tighten the vice on the North's already stumbling economy in punishment for sinking one of its navy ships, and both sides intensified war-like rhetoric.
South Korean President Lee Myung-bak, in a nationally televised address, said he would take the issue to the U.N. Security Council, whose past sanctions are already sapping what little energy North Korea's communist economy has left.
In what several diplomats in New York said was an unusual intervention in Security Council matters, U.N. Secretary General Ban Ki-moon expressed confidence the Council would take "appropriate" measures.
The United States, which backs Seoul, said the situation was "highly precarious" and that it would take part in a joint naval exercise with the South.
China, the North's only major ally, urged calm.
Last week international investigators issued a report accusing the North of torpedoing the Cheonan corvette in March, killing 46 sailors in one of the deadliest clashes between the two sides since the 1950-53 Korean War.
The United States, which has 28,000 troops on the peninsula, threw its full support behind South Korea and said it was working hard to stop the situation from worsening.
The Pentagon announced plans for a joint U.S.-South Korean anti-submarine drill "in the near future" and said talks were underway on joint maritime interdiction exercises. Seoul believes a North Korean submarine infiltrated its waters and fired on the Cheonan.
With Secretary of State Hillary Clinton in Beijing, Washington pressed China to rein in the hermit state, which is already at loggerheads with the international community over its program to build nuclear weapons.
China has avoided taking sides in the issue of the sunken ship. Analysts say it fears destabilizing the grip of North Korean leader Kim Jong-il, who looks increasingly frail as he tries to secure the position of his youngest son as successor to the family dynasty that has ruled for more than 60 years.
Vitriolic comments across the heavily defended border are rattling investors and niggling at diplomatic relations.
Few analysts believe either Korea would dare go to war. The North's military is no match for South Korean and U.S. forces. And for the South, conflict would put investors to flight.
"I solemnly urge the authorities of North Korea ... to apologize immediately to the Republic of Korea (South Korea) and the international community," the South Korean president said in his address.
His government also banned all trade, investment and visits with North Korea and stopped Pyongyang's commercial shipping using a cheaper route through its waters.
In New York, the U.N. secretary general Ban told a monthly news conference he was confident the Council would take measures "appropriate to the gravity of the situation.
He added that he hoped "the council's prompt action will also contribute to the early resumption of the six-party talks to address nuclear issues and other outstanding concerns."
The stalled six-party aid-for-disarmament talks included North and South Korea, China, Russia, the United States and Japan. North Korea is currently under U.N. sanctions for testing nuclear devices in 2006 and 2009.
The White House called South Korea's measures to punish the North entirely appropriate and told Pyongyang to stop its "belligerent and threatening behavior" as tensions on the peninsula escalated to their highest in years.
But Clinton avoided answering a question on whether Washington would support additional U.N. sanctions. China holds a veto and is very unlikely to support more U.N. sanctions.
Japan's prime minister instructed his cabinet to consider what form of sanctions could be taken over the sinking.
U.N. diplomats say it is unclear what, if anything, the 15-nation Council could do.
Secretary-general Ban, a former South Korean foreign minister, made no suggestions on measures. But his remarks could add pressure on China not to block all council action.
North Korea threatened to fire at equipment the South said it would put up to broadcast anti-Pyongyang messages and was ready to take stronger measures if the South boosted tension.
It also issued a statement repeating its position that it had the right to expand its nuclear deterrent.
"North Korea's goal is to instigate division and conflict," said Lee, speaking from the country's war memorial in Seoul. "It is now time for the North Korean regime to change."
South Korea said it planned to reduce the number of workers in a joint factory park just inside the North which has been an important source of income for the North Korean leadership.
Much of the diplomatic focus will be on China, the only major power to support North Korea and which this month -- to the south's annoyance -- hosted a rare overseas visit by the North's leader, Kim Jong-il.
Analysts say China's leaders fear that if North Korea's government falls, it will send chaos across into its territory and lead to U.S. troops moving right to its border.
A South Korean government report said the North's trade fell 10 percent last year and could fall further this year, making it even more dependent on China.
The South Korean won fell more than 2 percent to hit an eight-month intraday low against the dollar on investor jitters over the stand-off with the North as well as the continuing euro zone crisis.
Local financial markets took some relief from Lee's comments which avoided suggestion of military retaliation.
"South, North tension is certainly not positive, but given historical trends, losses that markets suffer over this will be brief, unless a drastic situation takes hold. By drastic, I mean war. I do not think war is likely though," said Kwak Joong-bo, a market analyst at Hana Daetoo Securities.
Additional reporting by Jungyoun Park and Yoo Choonsik in Seoul, Jeff Mason and Phil Stewart in Washington, Louis Charbonneau at the United Nations; Writing by Jonathan Thatcher; Editing by Ron Popeski and David Storey