SEOUL - SOUTH Korea warned on Thursday that that Asia's fourth biggest economy was already showing significant weakness as authorities added to a raft of measures to protect it from a looming global recession.

In its latest measure, the central bank increased the ceiling on cheap loans to smaller companies, which account for the bulk of jobs in South Korea, to 9 trillion won (S$9.48 billion) from the current 6.5 trillion won. The increase was bigger than expected and the first rise in seven years.

The Bank of Korea also said it could inject extra won liquidity into the financial system by buying bonds issued do local commercial banks.

Fears of an economic slide, which trounced US share prices overnight, also hit South Korean financial markets with shares tumbling to their lowest in over 3 years, while the won was at one stage was down 5 per cent.

'Of course there are some price-push pressures from the (weakening) won, but the domestic economy has considerably weakened in the third quarter,' Central Bank Governor Lee told a parliamentary committee.

Third quarter gross domestic product data will be announced on Friday.

He added that the decline in growth would be taken into account when deciding monetary policy - certain to be taken as a broad hint of more interest rate cuts to come after this month's first cut since late 2004.

'We expect the domestic economy to be considerably weak this year and through the first half of next year. International raw material prices have fallen sharply. We will operate interest rate policy taking into account these elements,' he said.

The government has already pledged more than US$130 billion (S$195 billion) to help liquidity-squeezed banks and construction companies stay afloat in what President Lee Myung Bak has said threatens to be an even more sever crisis than the Asian financial meltdown a decade ago that almost derailed the South Korean economy.

The increasing gloom knocked the main share index down over 8 per cent - it's lowest in 40 months.

And the won, already down about 17 per cent over the past month, slid 5 per cent at one point. It was quoted at 1,417.00/18.10.

'South Korea needs to be seen as a stable economy to contain persistent foreign selling, and in order for that, we absolutely need stabilisation in our foreign exchange markets,' said Mr Kim June Kie, a market analyst at SK Securities.

'A volatile won points to vulnerability of our financial markets and the economy, as we rely heavily on imports for our raw material needs,' he added.

Vulnerability worries have focused on the country's banks, struggling to find anyone willing to lend them dollars to service short-term dollar loans they raised during calmer times to help major exporters cover their own currency risks. Banks also face the treat of default from domestic borrowers.

On Wednesday, heads of the country's major banks pledged to cut their own costs, including taking pay cuts, in return for the government's rescue package.

But in a sign that the latest government measures to help banks were beginning to bear fruit, the state-run Export-Import Bank of Korea (KEXIM) said it had raised US$150 million through a 1-year Brazilian real bond issue and a 5-year note from Asia.

It was the first time a South Korean bank had secured such a foreign loan since the government offered state guarantees on bank borrowings. -- REUTERS