* North Korea fires scores of shells at South Korean island
* White House condemns attack
* China urges peace, Russia warns of "colossal danger"
* Global markets rattled, South Korean currency falls (Adds Pentagon comments, U.S. market)
By Jack Kim and Lee Jae-won
INCHEON, South Korea, Nov 23 (Reuters) - North Korea fired scores of artillery shells at a South Korean island on Tuesday, killing two soldiers, in one of the heaviest attacks on its neighbour since the Korean War ended in 1953.
The South fired back and sent a fighter jet to the area, which is close to a disputed maritime border on the west of the divided peninsula and the scene of deadly clashes in the past. South Korea was conducting military drills in the area at the time but said it had not been firing at the North.
The United States, which has 28,000 troops in South Korea, condemned the attack, but said it was too soon to discuss ways the U.S. military might deter the reclusive communist state from another strike. [ID:nN23137357]
The incident followed revelations over the weekend that Pyongyang is fast developing another source of material to make atomic bombs, and analysts said the North may again be pursuing a strategy of calculated provocations to wrest diplomatic and economic concessions from the international community.
It also follows moves by leader Kim Jong-il to make his youngest, but unproven, son his heir apparent, leading some analysts to suggest the bombardment might in part have been an attempt to burnish the ruling family's image with the military.
"Houses and mountains are on fire and people are evacuating. You can't see very well because of plumes of smoke," a witness on the island told YTN Television. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a Take A Look on Korea situation [ID:nKOREA]
For more analyses, context on Koreas [ID:nL3E6MN092]
Q+A on implications of attack [ID:nL3E6MN0VB]
Risks to watch on the Korean peninsula [ID:nRISKKR]
Analyst views [ID:nTOE6AM03I]
Markets tumble after Korean firing: [ID:nL3E6MN0FW]
Likely corporate losers, winners: [ID:nTOE6AM04K]
Reuters Insider http://link.reuters.com/vyr76q
Map locating Yeonpyeong: http://r.reuters.com/wyh76q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
YTN said at least 200 North Korean shells hit Yeonpyeong, which lies off the west coast of the divided peninsula near a disputed maritime border. Most landed on a military base there.
Photographs from the island, 120 km (75 miles) west of Seoul, showed smoke rising from buildings. Two soldiers were killed and 17 wounded. Three civilians were hurt.
News of the attack rattled global markets, already unsettled by Ireland's debt woes and a shift to less risky assets.
Experts say North Korea's Kim has for decades played a carefully calibrated game of provocation to squeeze concessions from the international community and impress his own military. The risk is that the leadership transition has upset this balance and that events spin out of control.
South Korean President Lee Myung-bak, who has pursued a hard line with the North since taking office nearly three years ago, said attacking civilians was unforgiveable and any further aggression by Pyongyang would be severely punished.
But he made no suggestion the South would retaliate further, suggesting Seoul was taking a measured response to prevent things getting out of hand.
The North has a huge array of artillery pointed at Seoul that could decimate an urban area home to around 25 million people and cause major damage to its trillion-dollar economy.
The two Koreas are still technically at war -- the Korean War ended only with a truce -- and tension rose sharply early this year after Seoul accused the North of torpedoing one of its navy vessels, killing 46 sailors.
North Korea said its wealthy neighbor started the fight.
"Despite our repeated warnings, South Korea fired dozens of shells from 1 p.m. ... and we've taken strong military action immediately," its KCNA news agency said in a brief statement.
South Korea said it had been conducting military drills in the area beforehand but had fired west, not north.
The White House said it was committed to defending the South, but the Pentagon said no steps were yet being taken to respond.
"Right now it's too soon. This happened several hours ago, so I wouldn't say we're looking at anything in particular at this point," said Colonel Dave Lapan, a Pentagon spokesman, asked whether the military was eyeing ways to deter the North.
The United States has about 28,000 troops in South Korea, their combined forces facing an estimated 1 million North Korean soldiers in one of the world's biggest standing armies.
Stephen Bosworth, the U.S. envoy on North Korea who was in Beijing for talks, said all sides agreed restraint was needed. "We both share a view that such conflict is very undesirable, and I expressed to them the desire that restraint be exercised on all sides and I think we agree on that," he told reporters.
China was careful to avoid taking sides, calling on both Koreas to "do more to contribute to peace." [ID:nBJB004000]
At the United Nations, Security Council diplomats said discussions were under way over when and how to take up the issue.
Russian Foreign Minister Sergei Lavrov called the escalation in tensions a "colossal danger." [ID:nLDE6AM0YH]
WON TUMBLES
News of the exchange of fire sent the won tumbling in offshore markets with the 1-month won <KRW1MNDFOR=> down about four percent at one stage in NDF trading. U.S. 10-year Treasury futures <TYc1> rose and the Japanese yen <JPY=> fell.
In New York, major U.S. stock market indexes fell about 1 percent shortly after the open as the rising tensions on the Korean peninsula added to worries about global economic conditions. The U.S. dollar was up 1 percent against a basket of currencies as investors sought the safety of the greenback. [ID:nN23133889].
The South Korean central bank, after an emergency meeting, said it planned to cooperate with the government to take measures to stabilise markets if necessary. Many traders expect South Korea's financial markets to fall further when trading opens on Wednesday. [ID:nSEV000234]
But analysts said the attack was not likely to escalate into a more serious military confrontation and so any market losses would be temporary. Past provocations by Pyongyang have had only a fleeting negative effect on South Korean markets.
"We believe the market correction this time will be very short-lived,' said Young Chang, analyst at UBS in Seoul.
"Over several decades, North Korea has created similar geopolitical tensions in order to redirect their national interest to defence, which we believe helps the regime maintain power. North Korea's interest is to maintain the regime and not to invade South Korea, in our view."
Washington has branded the North a danger to the region and expressed concern Pyongyang would sell nuclear weapons technology to other states. It has said it was ready to return to negotiations with North Korea but wants to see more commitment to denuclearisation beforehand.
"It's unbelievable," said Zhu Feng, professor of international relations at Peking University. "Today's news proves that North Korea, under unprovoked conditions, shot these South Korean islands. It's reckless provocation. They want to make a big bang and force the negotiations back into their favour. It's the oldest trick."
The North depends heavily on China for economic and diplomatic support and Kim Jong-il has visited China twice this year, in part to gain backing for his succession plans.
Those ties have become a sore point with Washington after reports that North Korea appears to have made big steps towards enriching uranium, possibly using technology that passed through or even originated in China. [ID:nLDE6AL11O] (Reporting by Seoul bureau, Michael Martina in Beijing, Andrei Makhovsky in Minsk, and Alister Bull and Phil Stewart in Washington; Writing by Jonathan Thatcher and Andrew Marshall; Editing by John Chalmers and Doina Chiacu)
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