SEOUL A South Korean naval ship sank near the disputed maritime border with North Korea, killing some of the more than 100 crew on board, but officials played down suggestions that it may have been attacked by the North.
A defense ministry official later said that the unidentified object the vessel had fired at on Friday night near the western sea border that divides the two Koreas may well have been a flock of birds.
Initial fears that North Korea might be to blame caused ripples on Wall Street, where share prices dipped partly on geopolitical concerns, and the South Korean won dropped against the dollar.
"It is premature to discuss the cause of this sinking," presidential Blue House spokeswoman Kim Eun-hye told Reuters early on Saturday. "It is not clear whether North Korea was involved."
The Joint Chiefs of Staff also said it could not conclude that the reclusive North was behind the attack.
Yonhap news agency quoted a presidential official as saying satellite pictures and other information showed no sign of the North Korean military in the area at the time of the sinking.
The defense ministry said 58 of the 104 on board had been rescued and Yonhap quoted navy officials as saying several had died.
"An unidentified reason caused a hole in the ship, which led to its sinking. Currently 58 have been rescued out of the total 104 on board. Rescue efforts are under way," the ministry said.
"The ship fired a warning shot at an unidentified object, and the object was later suspected to have been a flock of birds. But we are checking."
Earlier, South Korean media had quoted officials as saying the North could have torpedoed the ship.
The sinking comes as the impoverished North has become increasingly frustrated by its wealthy neighbor, which has given the cold-shoulder to recent attempts to reopen a lucrative tourist business on the northern side of the Cold War's last frontier.
It also coincides with mounting pressure on Pyongyang to end a more than one-year boycott of international talks to end its efforts to build a nuclear arsenal.
Reports of a possible naval clash saw the won weaken roughly 0.45 percent against the dollar and were cited by analysts as one reason for a dip in U.S. stocks.
The price to insure Korean sovereign debt rose to 83 basis points from 78 basis points in the wake of the news, according to two trading sources. That means the cost to insure $10 million in South Korean debt increased by $5,000 to $83,000.
Markets have become used to saber-rattling by North Korea and occasional brief border skirmishes, and dips in response to such incidents tend to be quickly reversed.
In Seoul, the government held an emergency security meeting following the incident.
The ship sank near the disputed Yellow Sea border off the west coast of the peninsula which was the scene of two deadly naval fights between the rival Koreas in the past decade.
Navies from the rival Koreas exchanged gunfire for the first time in seven years in the Yellow Sea waters in November, damaging vessels on both sides.
The international community has been pressuring the North to give up efforts to build nuclear weapons, promising help for its broken economy if it does so.
There has been widespread speculation that North Korea's iron ruler, Kim Jong-il, was about to visit China, his only significant ally and on which he has depended almost entirely for economic aid after a new conservative government in Seoul effectively ended years of free-flowing assistance.
(Additional reporting by Kim Miyoung and Jon Herskovitz; Writing by Jonathan Thatcher; Editing by Alex Richardson)