(Adds N.Korea saying Kim Jong Un led missile launch drill)
* Trump says North Korea's message received "loud and clear"
* Missile flies 1,680 miles, reaches high altitude - S.Korea
* Test follows rise in tension during U.S.-S.Korea drills
By Susan Heavey and Jack Kim
WASHINGTON/SEOUL, Aug 29 (Reuters) - President Donald Trump warned on Tuesday that all options are on the table for the United States to respond to North Korea's firing of a ballistic missile over northern Japan's Hokkaido island into the sea in a new show of force.
The missile test further increased tension in east Asia as U.S. and South Korean forces conducted annual military exercises on the Korean peninsula, angering Pyongyang which sees the war games as a preparation for invasion.
North Korea has conducted dozens of ballistic missile tests under its leader, Kim Jong Un, in defiance of U.N. sanctions, but firing projectiles over mainland Japan is rare.
Trump, who has vowed not to let North Korea develop nuclear missiles that can hit the mainland United States, said the world had received North Korea's latest message "loud and clear".
"Threatening and destabilising actions only increase the North Korean regime's isolation in the region and among all nations of the world. All options are on the table," Trump said in a statement.
Trump and Japanese Prime Minister Shinzo Abe spoke and agreed that North Korea "poses a grave and growing direct threat" to the United States, Japan and South Korea, the White House said.
Investors flocked to safe-haven assets after the missile firing.
The dollar fell to its lowest in more than 2-1/2 years against a basket of major currencies but then rebounded, while benchmark 10-year U.S. Treasury note yields fell and the price of gold hit more than a nine-month peak. U.S. stocks recovered from a sharply lower open.
Initial assessment indicates the North Korean missile was an intermediate-range ballistic missile (IRBM), the Pentagon said in a statement. Two U.S. officials said it appeared to be a KN-17, or Hwasong-12.
North Korea's Kim guided a launch of its Hwasong-12 intermediate-range ballistic missile on Tuesday in a drill to counter the joint exercises by South Korean and U.S. militaries, the North's official KCNA news agency said on Wednesday.
"The current ballistic rocket launching drill like a real war is the first step of the military operation of the KPA in the Pacific and a meaningful prelude to containing Guam," KCNA quoted Kim as saying.
Pentagon spokesman Colonel Robert Manning said diplomacy was still Washington's preferred option with Pyongyang.
North Korea was defiant.
"The U.S. should know that it can neither browbeat the DPRK with any economic sanctions and military threats and blackmail nor make the DPRK flinch from the road chosen by itself," North Korea's official Rodong Sinmun said, using the initials of the North's official name, the Democratic People's Republic of Korea.
The North vows to never give up its weapons programs, saying they are necessary to counter hostility from the United States and its allies.
The United States has said before that all options, including military, are on the table, although its preference is for a diplomatic solution.
The United States is technically still at war with the North because their 1950-53 conflict ended in a truce, not a peace treaty. Relations worsened last year when North Korea staged two nuclear bomb tests.
U.S. Ambassador to the United Nations Nikki Haley said the launch was "absolutely unacceptable and irresponsible" and that the Security Council now needed to take serious action.
Saying "enough is enough," Haley said she hoped China and Russia would continue to work with the rest of the Security Council when it meets on Tuesday afternoon to discuss what more can be done about North Korea's nuclear and missile programs.
The Security Council earlier this month unanimously imposed new sanctions on North Korea after it staged two long-range missile launches in July.
In response to Trump's statement that all options are on the table, Russian U.N. Ambassador Vassily Nebenzia told reporters: "It's troubling, because tensions are high and whose nerves are stronger, we don't know."
A U.S. official denied a report by Japan's Nikkei newspaper that the United States and Japan will call at Tuesday's meeting for an international embargo on oil exports to North Korea. Securing diplomatic agreement to such a ban would likely be extraordinarily difficult.
Diplomats say China and Russia typically only view a test of a long-range missile or a nuclear weapon as a trigger for further possible U.N. sanctions. Negotiations on the past three substantial U.N. sanctions resolutions have taken between one and three months.
The United States has proposed that the Security Council adopt a statement on Tuesday condemning North Korea's ballistic missile launch and imploring "all states to strictly, fully, and expeditiously implement" U.N. sanctions on Pyongyang, according to a copy of the draft statement seen by Reuters.
The draft statement does not threaten new Security Council action against North Korea.
In China, North Korea's lone major ally, foreign ministry spokeswoman Hua Chunying said the crisis was "approaching a critical juncture", but it might also be a turning point to open the door to peace talks.
The launch was North Korea's second since U.S. Secretary of State Rex Tillerson appeared to make a peace overture last week, by welcoming what he called the restraint Pyongyang had shown by not conducting tests for several weeks. Trump also expressed optimism last week about a possible improvement in relations, saying of North Korea's Kim: "I respect the fact that he is starting to respect us."
Some experts in Asia said Kim was trying to pressure Washington to get to the negotiating table with the latest missile tests.
"(North Korea) thinks that by exhibiting their capability, the path to dialogue will open," said Masao Okonogi, professor emeritus at Japan's Keio University.
South Korea's military said the missile was launched from near the North Korean capital, Pyongyang, just before 6 a.m. (2100 GMT on Monday) and flew 2,700 km (1,680 miles), reaching an altitude of about 550 km (340 miles).
Four South Korean fighter jets bombed a military firing range on Tuesday after President Moon Jae-in asked the military to demonstrate capabilities to counter North Korea.
South Korea and the United States had discussed deploying additional "strategic assets" on the Korean peninsula, South Korea's presidential Blue House said in a statement, without giving more details.
Earlier this month, North Korea threatened to fire four missiles into the sea near the U.S. Pacific territory of Guam after Trump said it would face "fire and fury" if it threatened the United States.
North Korea fired what it said was a rocket carrying a communications satellite into orbit over Japan in 2009 after warning of its plan. The United States, Japan and South Korea considered it a ballistic missile test.
The latest missile fell into the sea 1,180 km (735 miles) east of Hokkaido, the Japanese government said.
In many northern Japanese towns, sirens wailed and loudspeakers urged residents to take precautions, sending some scrambling to leave their houses while others confessed they had no idea what they should do.
(Additional reporting by Soyoung Kim in Seoul, Malcolm Foster, Chris Gallagher, Chang-ran Kim and Linda Sieg in Tokyo, Idrees Ali, David Brunnstrom, and David Alexander in Washington, Michelle Nichols at the United Nations and Ben Blanchard in Beijing; Writing by Nick Macfie and Alistair Bell; Editing by Paul Simao and James Dalgleish)
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