HONG KONG: Rising tensions on the Korean peninsula hit Asian stocks Monday with markets in Seoul and Tokyo sinking as the South decided to press ahead with a live-fire artillery test.
Traders were wary that the drill would provoke an aggressive response from the North and had already prompted an emergency session of the UN Security Council at the request of Russia.
Seoul ended down 0.30 percent, or 6.02 points, to 2,020.28 and Tokyo fell 0.85 percent, or 87.42 points, to 10,261.41.
However, earlier losses were pared and the won bounced back on reports that US negotiator Bill Richardson had managed to persuade Pyongyang to permit the return of UN nuclear inspectors as part of a package of measures to ease tensions.
Hong Kong slipped 0.74 percent in the afternoon as the banking sector was hit by lingering concerns over European debt levels, while Shanghai tumbled 2.37 percent, with dealers worried China will hike interest rates.
Sydney fell 0.56 percent, or 26.5 points, to 4,736.6.
Seoul began the US-backed tests in the afternoon on the South's island of Yeonpyeong, which Northern forces shelled last month, killing four South Koreans, two of them civilians.
The military told civilians on five South Korea border islands to take shelter.
Some profit-taking added to selling pressure after recent gains, with trade sluggish as foreign investors took to the sidelines ahead of Christmas holidays, brokers said.
"There is a tendency for downward corrections when the market momentum is sluggish with foreign investors away," Kenichi Hirano, operating officer at Tachibana Securities, told Dow Jones Newswires.
Shares in Shanghai were sent tumbling as lingering fears China will hike interest rates to tame inflation hit property developers.
The sector was also concerned prices could fall and supply grow after the Ministry of Land and Resources Sunday urged local authorities to take measures to curb rising land prices and maintain a stable supply of land for residential use.
On currency markets the won rose against the dollar, rebounding from a one-month low earlier in the day, as dealers welcomed the North's agreement with Richardson.
The greenback fell to 1,161.80 won, down from 1,172.30 earlier Monday.
The euro was hit by concerns over European sovereign debt after Moody's Investors Service Friday cut its credit rating on Ireland by five notches, citing uncertainties over its economy and public finances.
In Tokyo afternoon trade the single currency fell to 1.3151 dollars from 1.3185 in New York late Friday and to 110.33 yen from 110.78 yen. The dollar edged down to 83.89 yen from 83.94 yen.
Ireland's downgrade came a day after European leaders agreed to set up a permanent financial stability mechanism from 2013 to shore up the euro amid fears Portugal and Spain may need bailouts after Irish and Greek rescues.
But there was no decision to increase its size beyond the bloc's temporary 750 billion euro fund or allow it to purchase government bonds, or introduce a common European bond, John Kyriakopoulos of National Australian Bank noted.
"As such, European sovereign debt concerns are likely to linger into the New Year," he wrote in a note, adding investors needed to watch European bank funding costs.
On oil markets New York's main contract, light sweet crude for delivery in January, rose seven cents to 88.09 dollars per barrel in the afternoon on its last trading day.
Brent North Sea crude for February delivery gained nine cents to 91.76 dollars.
Gold opened at 1,384.00-1,385.00 US dollars an ounce in Hong Kong, up from Friday's close of 1,375.00-1,376.00.
In other markets:
-- Taipei fell 0.56 percent, or 49.18 points, to 8,768.72.
Taiwan Semiconductor Manufacturing Company fell 2.33 percent to 71.2 Taiwan dollars while computer maker Acer rose 0.89 percent to 91.0.
-- Manila rose 0.49 percent, or 19.73 points, to 4,077.06.
Top-traded Cebu Air rose 0.19 percent to 106.20 pesos while Metropolitan Bank gained 4.04 percent to 64.40 pesos. San Miguel Corp. surged 6.79 percent to 149.50 pesos.
-- Wellington fell 0.76 percent, or 25.15 points, to 3,299.96.
NZOG, the largest stakeholder in the Pike River colliery where 29 miners died in a series of explosions last month, fell 2.3 percent to 84 New Zealand cents, Fletcher Building was flat at 7.73 dollars and Air New Zealand rose 1.4 percent to 1.49.
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