SEOUL - SOUTH Korea is considering providing state guarantees for interbank loans to stabilise shaky financial markets, Finance Minister Kang Man Soo said on Friday.

Mr Kang said Seoul was ready to take 'preemptive, swift and sufficient' measures to calm the foreign exchange market.

Comprehensive measures would be announced on Sunday, he told reporters after an urgent meeting with other senior economic officials, adding these could include state guarantees for interbank loans.

The won has been Asia's worst performing major currency this year, falling from 937 to the US unit on January 2 to 1,334 on Friday.

South Korea, Asia's fourth largest economy, has already taken a series of steps to prop up the currency and ease credit shortages.

The central bank said that from Tuesday it would supply dollars directly to banks suffering from dollar shortages through competitive bidding in the swap market.

Currently, local banks take part in currency swap deals only through some intermediary banks.

All local banks dealing with foreign currencies would be allowed to take part in currency swap bidding through which the central bank would directly provide end-users with dollars, the Bank of Korea said in a statement.

'This new trading system will help enhance stability and predictability in the currency market,' it said.

The National Pension Service said it would expand purchases of bonds issued by local companies and banks amid the deepening credit squeeze.

The pension fund, the country's biggest institutional investor, manages more than 229 trillion won (168.5 billion dollars).

South Korea's current account deficit, rising overseas debts and the flight of foreign funds from the stock market have fuelled the won's fall.

On Friday, it closed at 1,334 won against the dollar, up 39 won or 2.9 per cent from a day earlier. Sentiment was eased by the central bank's move and by Moody's decision to retain the country's credit ratings outlook.

The ratings agency announced it was maintaining the stable outlook for Korea's A2 local and foreign currency government bond ratings, saying the country was better prepared to deal with the current financial crisis than it was in 1997.

'The ratings are supported by Korea's high economic resiliency but are tempered by a mid-range, rather than low, susceptibility to event risk,' said Mr Tom Byrne, a senior vice-president.

'Additional support comes from the economic and financial restructuring of the past decade and the accompaniment of a prudent fiscal stance and a relatively strong government balance sheet.'

Moody's said Korea's banking sector had 'relatively high vulnerabilities' to the global crisis but 'is much better positioned to weather the current crisis than that of 1997'.

Mr Byrne said in a statement that banks in South Korea and elsewhere faced severe pressure in rolling over foreign debts.

But the government still had the resources to provide dollar liquidity to domestic banks, despite an ebbing in foreign exchange reserves which now stand at around 240 billion dollars (S$354 billion).

South Korea was forced to accept a 58 billion dollar bailout from the International Monetary Fund in 1997 to avoid state bankruptcy. -- AFP