* North holds "military drill" off tense west coast
* Visiting US Admiral Mullen: North making region dangerous
* American Bill Richardson to visit Pyongyang
* U.S. and S.Korea say will hold more joint drills (Adds economist, Mullen quotes)
By Paul Eckert
SEOUL, Dec 8 (Reuters) - North Korea fired artillery shells in a suspected military drill on Wednesday, spooking markets on an already tense peninsula, as the top U.S. military official warned of more provocations from Pyongyang's "bad guy".
South Korea's military said an unknown number of artillery shells from the North fell on its side of a disputed maritime border off the west coast, adding the firing was most likely part of regular exercises.
The South is also conducting live-fire drills in the area.
"It does not appear to be a matter of great concern," a South Korean military official said. However, jittery markets fell on news of artillery firing, but within minutes local shares and the won had recovered their losses.
Markets had been become largely inured to Pyongyang's provocations in recent years, but have become more sensitive to North Korean risk after last month's shelling of South Korean territory and Seoul's pledge to hit back hard if attacked again.
"It has been going in a different way than before qualitatively, therefore we are seeing it as a risk that we cannot ignore next year," said Goohoon Kwon, an economist with U.S. investment bank Goldman Sachs in Seoul.
Wednesday's firing came just over two weeks after four South Koreans, including two civilians, were killed in shelling of Yeonpyeong island. That followed the North's revelations of advances in its nuclear programme, opening a second route to make an atomic bomb.
The attack set off a flurry of diplomatic activity involving Seoul, Washington, Tokyo and the North's ally Beijing, and next week, a former U.S. special envoy to North Korea, current New Mexico Governor Bill Richardson, will meet government officials in Pyongyang, a senior U.S. official said.
The official, who did not want to be indentified, said Richardson would not be "delivering a message" on this private trip, but the Washington Post reported he had been invited by top North Korean officials involved in the nuclear programme.
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The two Koreas frequently conduct drills in the area around the Northern Limit Line (NLL) off the North's west coast. Pyongyang does not recognise the sea border which was established without its consent after the 1950-53 Korean war.
The test firing came as Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, arrived in Seoul for a two-day trip that will also take him to Japan.
Mullen said there was "no doubt in my mind (provocations) will continue unless leaders step forward and put Pyongyang in a position where they realise their behavior has to change".
"This guy's a bad guy and when you're dealing with bad guys, you can't wish away what they're going to do," Mullen said of the North's iron ruler Kim Jong-il.
"Because of the actions taken by North Korea recently ... they're making (the region) a more dangerous place," he added.
The U.S. and South Korean militaries also agreed on Wednesday to stage more joint military drills, following last week's giant exercise of the west coast, to deter North Korean aggression.
Mullen said said however they would avoid taking steps that would escalate into a conflict on the peninsula.
"The North should not mistake this restraint as a lack of resolve -- nor should they interpret it as willingness to accept continued attacks to go unchallenged," he said.
CHINA UNDER PRESSURE
Mullen's trip to South Korea and Japan follows talks in Washington on Monday between Secretary of State Hillary Clinton and her Japanese and South Korean counterparts. All three voiced grave concerns over the North Korean attacks and called on China to take action against its wayward ally.
On Tuesday, Beijing hit back at the United States and its Asian allies for their refusal to talk to North Korea, saying dialogue was the only way to calm escalating tension on the divided Korean peninsula.
But Mullen said the Chinese must do more.
"They are a world leader and leaders must lead -- particularly to prevent crises and to prevent the kinds of destabilising activities that are very evident coming out of the leadership in Pyongyang," he said.
"China has unique influence. Therefore, they bear unique responsibility," Mullen told a news conference in Seoul.
China views the North as a strategic buffer against the U.S.-allied democracy South Korea and is Pyongyang's largest trade partner and benefactor.
Deputy Secretary of State Jim Steinberg will lead a U.S. delegation to China next week to try to persuade Beijing to put more pressure on Pyongyang despite Chinese fears that this may destablilise North Korea, a U.S. official said.
Washington, Seoul and Tokyo have been lukewarm towards Beijing's proposal for emergency talks between the six regional powers, worried that they could be seen as rewarding Pyongyang for its deadly attack on a South Korean island two weeks ago.
(Additional reporting by Jeremy Laurence, Danbee Moon and Kim Yeonhee in Seoul; Editing by Miral Fahmy) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)
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