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Two Koreas trade fire, spooks markets

By Jack Kim

SEOUL (Reuters) - North and South Korea exchanged artillery fire near their disputed sea border on Wednesday, the second time in three months the rivals have clashed and briefly sending prices down on jittery Seoul financial markets.

Analysts doubted the latest clash would escalate and saw it more as an attempt by Pyongyang to stress the instability on the Korean peninsula and press home its demand for a peace deal that would open the way to international aid for its ruined economy.

South Korea's Joint Chiefs of Staff said the North fired artillery shots from land toward the South but landing on its side of the disputed sea border off the west coast.

South Korea returned fire from its coastal artillery.

The presidential Blue House said both sides fired into the air and there were no casualties, according to Yonhap, adding it had called a meeting of top national security officials.

North Korean state media made no comment on the incident.

Earlier this week it accused the South of declaring war by saying it would launch a pre-emptive strike if it had clear signs the North was preparing a nuclear attack.

The latest clash also comes amid signals from Pyongyang it was ready to return after a year-long boycott to six-country talks -- between the two Koreas, China, Japan, Russia and the United States -- on ending its atomic arms program.

"North Korea may want to return to the six-party talks, but only to ease pressure on itself and gain more economic assistance, which it really needs now," said Zhang Liangui, who is an expert on North Korea at the Central Party School, a prominent institute in Beijing.

"So North Korea wants to control the pace of contacts with South Korea and the United States. Incidents such as this are a way for it to show that it can control how and when there is any progress," Zhang said.

In return for resuming disarmament negotiations, North Korea has demanded talks on a peace treaty with the United States to finally end the 1950-53 Korean War and the lifting of U.N. sanctions over its two nuclear tests.

Analysts say tightened sanctions since last year have badly hit the failing economy, especially its main export -- weapons.

There have also been overtures for dialogue with Seoul after two years of increasingly tense ties with the government of President Lee Myung-bak who has linked improved relations to action by the North to disarm and end the security risk affecting the peninsula and the rest of prosperous North Asia.

MARKETS RATTLED

News of the firing rattled markets, with Seoul's main stock exchange briefly extending losses and the won wiping out early gains against the dollar.

Both later recovered and analysts saw little long-term impact from the standoff.

"Investors know that North Korea is in dire need of material support, and the country will not likely take drastic action," said Shim Jae-youb, a market analyst at Meritz Securities.

North Korea has declared a no-sail zone in the Yellow Sea waters for two months ending in late March, South Korea's Unification Ministry said, a sign it might be preparing to test fire missiles.

The area is near a contested sea border between the rival Koreas that was the site of a brief naval clash in November as well as deadly confrontations in previous years between the states which are technically still at war.

About a month before that clash, North Korea raised regional security concerns by firing short-range missiles off its east coast.

(Additional reporting by Jon Herskovitz, Christine Kim and Jungyoun Park in Seoul and Chris Buckley in Beijing; Editing by Jonathan Thatcher and Jeremy Laurence)

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