Japan and China have the world?s largest foreign exchange reserves, with a combined $2.8 trillion stockpile, and with Seoul they have provided the firepower for a pact to guarantee Asian currency stability since capital fled the region in 1997/98.

With the Korean won currency headed for its worst year since that crisis, Finance Minister Kang Man-soo urged Korean banks to sell foreign assets to raise dollars that other banks are now reluctant to lend them.

He also promised to use Korea?s currency reserves, the world?s sixth largest at nearly $240 billion, to shield lenders from the financial crisis engulfing the United States and Europe.

The state-run Export-Import Bank of Korea (KEXIM) finished on Monday allocating $5 billion to local banks, as promised, and with two other state banks aimed to borrow nearly $1 billion from abroad, local media reported.

The promise and the dollar injection did little to reassure markets in a country that analysts say faces greater risks than most in Asia from the upheaval that destroyed Wall Street investment banks last month and now threatens lenders from Iceland to Italy.

The Korean won fell 5 percent to its weakest since 2002 and the cost of borrowing on the money market surged. The Seoul stock market, tracking a regional selloff, tumbled nearly 5 percent to a 20-month low. South Korean President Lee Myung-bak wants to hold talks on the global crisis with leaders of China and Japan, most probably later this month, a presidential Blue House official said. Lee called last week for the three countries to speed up a plan to create an $80 billion pool of currency swaps among east Asian countries to act a buffer against financial turmoil, replacing a series of individual swap agreements.

$700 billion plan

Under the existing system of swaps Seoul, Tokyo and Beijing effectively allow poorer Southeast Asian nations to draw on some of their dollar reserves in times of crisis. ?The government judges that we need to deal with the situation preemptively, while assuming the worst-case scenario,? Finance Minister Kang said at a meeting with executives from commercial banks. He did not elaborate on what preemptive action might include.

Kang said it would take a long time for emerging markets to feel the impact of a $700 billion plan approved last week by US lawmakers to buy bad mortgage debt from Wall Street banks, and urged Korean lenders to act quickly.

?Banks need to take measures themselves such as selling foreign-currency securities and other assets to secure foreign exchange liquidity,? he said.

Shares in South Korean banks fell in step with the broader market. The bank index has fallen 25 percent this year, against a 28 percent loss in the broader market.

South Korea looks more vulnerable than many Asian nations to the credit squeeze started by U.S. mortgage defaults last year that has now triggered bank failures and nationalisations in the United States and Europe.

?Although we are not expecting a banking crisis in Korea, the credit crunch is likely to be most severely felt in Korea among Asian economies, given the highly leveraged Korean corporate and households,? analysts at UBS said in a note.

Household debt in Korea has hit 82 percent of gross domestic product and 148 percent of disposable income. The bank loans-to-deposits ratio is at 139 percent after a lending spree between 2002 and 2007.

Most Asian countries have loans-deposit ratios below 100 with Malaysia at around 74 percent and the Philippines at 57 percent. The loans-to-deposit ratio of the four biggest Korean banks ? Kookmin Bank, Woori Finance Holdings, Shinhan Financial Group and Hana Financial Group ? ranged between 135-177 percent in the first quarter of 2008, Moody?s Investors Service said. ?The current difficulties are a result of the global liquidity squeeze rather than risk issues at individual banks,? said spokesman You Jung-youn at Kookmin, the biggest lender. ?It is more about the country risk.?

The government has spent almost $25 billion since March to support the won, which has lost 26 percent since December and appears headed for its worst year since the Asian crisis.

Hit by export markets

Korea is also on track to post its first annual current account deficit since that crisis and foreign investors have notched up net stock sales of 30 trillion won ($24.57 billion) this year, already the highest on record.

Although most Korean companies are solid, they are being hit by the financial crisis in their export markets, unprecedented volatility in the won, and now difficulty in getting dollar funds.

?It is a matter of time before our finances and businesses worsen,? said Chu Woo-sik, senior executive in charge of investor relations at Samsung Electronics, the country?s largest listed company and a leading memory chip, television and mobile phone maker.

The won, which suffered its worst month since thecrisis with a 10% slide in September, fell 4.9% yesterday to 1,286.9. South Korean markets were closed Friday for a holiday.

In the local swap market, the cost of raising dollars for one-month rose to 7.0 won per dollar from around 5.0 won last week, dealers said.

The yield on the three-month certificates of deposit, one of the main tools for South Korean banks to raise short-term money, rose to a 7-1/2-year high of 5.90 percent by the end of the morning session.