YEONPYEONG, South Korea (Reuters) - South Korea held live firing drills in a disputed area on Monday despite threats of war from Pyongyang after an emergency U.N. Security Council meeting failed to agree on how to defuse the crisis.
The drill, delayed from the weekend by bad weather, lasted almost two hours with near constant artillery fire, some near and some distant, which shook air raid bunkers on the island of Yeonpyeong. There was no immediate North Korean response.
"I can't exactly tell how many have been fired, some are distant and some are noisy. The bunker is shaking and people here are worried, including myself," said a Reuters witness.
There was no incoming fire.
On November 23, the last time Seoul conducted firing drills from Yeonpyeong close to the disputed maritime border off the west coast of the peninsula, Pyongyang retaliated by shelling the island, killing two civilians and two marines in the worst attack on South Korean territory since the Korean war ended in 1953.
But amid the tension there was also a report of a potential diplomatic breakthrough, with U.S. troubleshooter Bill Richardson winning concessions from North Korea on the return of nuclear inspectors, according to CNN.
North Korea warned last week that it would strike even harder if the latest drills went ahead. China and Russia have cautioned Seoul against holding the exercise, while the United States has backed South Korea's right to hold the drills.
The tension initially hit Korean markets when they opened on Monday, with the won falling nearly 2 percent to a four-week low against the dollar and stocks also down 1 percent in early trade.
But shares recouped most of their losses to close down just 0.3 percent, slightly outperforming the region as a whole, while the won ended local trade higher against the dollar. Some dealers cited the tensions as a factor helping push gold up by 1 percent on international markets.
Sunday's announcement that Seoul would impose a levy on the foreign debt of banks from late 2011 also weighed on markets. The move was Seoul's latest attempt to discourage too much speculative hot money flowing into South Korean assets, a reminder that local markets are bullish despite the tensions.
"The fact that foreign investors are continuing to buy comes as a reassuring sign," said Kwak Joon-bo, analyst at Samsung Securities. "Unless North Korea takes actions that are akin to its artillery shelling of the island, the market will be relatively calm."
New Mexico Governor Richardson, visiting Pyongyang to try to ease tensions, won agreement from North Korea to allow U.N. nuclear inspectors to return, according to CNN which has a team traveling with him.
Pyongyang "agreed to allow International Atomic Energy Agency personnel to return to a nuclear facility in the country and agreed to negotiate the sale of 12,000 ... fuel rods and ship them to an outside country, presumably to South Korea," CNN said, quoting correspondent Wolf Blitzer in Pyongyang.
"The North has also agreed to consider Richardson's proposal for a military commission between the United States, North Korea and South Korea as well as a separate hotline for the Koreas' militaries."
The South Korean Foreign Ministry said it could not confirm the agreement.
"We do not have the specific details yet, so it is too early to make an official evaluation," a spokesman said.
Richardson was visiting in an unofficial capacity, the traditional means of communication between the two sides, but it was unclear whether the reported agreement would ease tensions, particularly given Pyongyang's poor record of honoring deals.
North Korea expelled inspectors in April 2009 after ripping up a previous disarmament-for-aid agreement.
North Korea expert Kim Yong-hyun of Dongguk University said the proposed sale of fuel rods would indicate Pyongyang was offering to shut down its plutonium-based nuclear programme, which bringing back inspectors would also indicate.
"It means that they are prepared to give up, at least in part, the plutonium programme, which has been the source of the fuel rods they came up with," he said. "It would be considerable progress, if true."
However, North Korea last month unveiled major technical progress in uranium enrichment, suggesting another reason it could be willing to end the plutonium programme.
FEARS OF ESCALATION
Both sides have said they will use force to defend what they say is their territory off the west coast, raising international concern that the standoff could quickly spiral out of control.
Yonhap quoted military officials as saying shells fired in the drill would land more than 10 km (6 miles) from the maritime border. But Pyongyang disputes the border and said last week that it would be a suicidal provocation for Seoul to hold the exercise.
"The South Korean puppet warmongers going in league with outside forces are getting ever more frantic in their moves for a war of aggression... pushing the situation to the brink of a war," North Korea's Rodong Sinmun newspaper said on Monday.
South Korean officials said the North had been making military preparations similar to those observed ahead of last month's deadly clash, removing covers from coastal artillery and forward-deploying some artillery batteries.
Seoul defends the drills as routine and says it has been holding them on a monthly basis for years. China and Russia say holding the exercise now will only increase tension.
"Let me reiterate very strong concern of the Russian Federation that within hours there may be a serious aggravation of tension, a serious conflict for that matter," said Russia's U.N. Ambassador, Vitaly Churkin. "It's better to refrain from doing this exercise at this point in time."
Wang Min, China's representative at the Security Council meeting, warned that "the situation on the Korean peninsula is perilous" and defended Beijing's approach to the crisis.
"If a bloody clash breaks out on the Korean peninsula, that would first of all hurt the people on both sides of the peninsula and bring a national tragedy of mutual fratricide between the compatriots in the North and South," Wang told the Security Council, according to Xinhua.
Russia had called Sunday's emergency Security Council meeting to try to prevent an escalation, but major powers failed to agree on a draft statement due to differences over whether to lay the blame on Pyongyang.
"The gaps that remain are unlikely to be bridged," said Susan Rice, the U.S. ambassador to the U.N.
Other council diplomats, however, said it was possible the council could return to the issue as early as Monday.
Western diplomats said China and Russia were pushing for an ambiguous statement that would not have blamed North Korea for the crisis, but would have called on both sides to exercise restraint. Rice said the "vast majority" of council members did not want an ambiguous statement.
(Additional reporting by Jack Kim, Yoo Choonsik and Jeremy Laurence in Seoul, Louis Charbonneau at the United Nations and Chris Buckley in Beijing; Writing by Andrew Marshall; Editing by Nick Macfie and Alex Richardson)
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