By Cheon Jong-woo

But in a sign of mounting concern, top economic ministers and head of the central bank plan to meet later in the day to discuss the financial upheaval that began with the U.S. housing market and now threatens lenders around the world, including those in South Korea.

The president, Lee Myung-bak, has already called for a summit with China and Japan on how to deal with the crisis and the finance minister has urged South Korea's banks to sell foreign assets to raise the dollars that other banks were unwilling to lend them.

"The current crisis situation is different from that in 1997," Yonhap news agency quoted Lee as saying during a scheduled cabinet meeting.

"We don't have to be overly optimistic, we don't need to be pessimistic and caught up in a fear of crisis," said Lee, whose promise to reform the economy after taking office in February has been repeatedly knocked off course first by domestic opposition and now the global financial crisis.

South Korea only escaped a sovereign default in the Asian financial crisis in 1997/98 with the help of an international rescue package worth close to $60 billion coordinated by the International Monetary Fund.

In addition, banks now are able to secure short-term foreign exchange funds, unlike a decade ago, Rhee Chang-yong, vice chairman of the Financial Services Commission, the main regulator, told financial analysts.

Still, the latest official comments have failed to dispel market fears that the global credit crunch, which has seen banks withdraw from short-term lending markets, will bite South Korea's financial industry especially hard because of high levels of household and small-company debt.

In one move to counter the foreign currency squeeze, state-run Korea Development Bank (KDB) said it planned to borrow up to $4 billion by the end of the year.

WORST PERFORMER

The won slumped close to 6 percent against the dollar on Tuesday to hit its lowest level since April 2001, adding to a 5 percent slide on Monday.

The currency is the worst performer this year, by far, among 10 Asian currencies tracked by Reuters News and was quoted around 1,334.80 at 0448 GMT. It has dropped a third so far this year.

While a weak currency helps top exporters such as Hyundai Motor <005380.KS> and POSCO <005490.KS> compete in world markets, analysts say any longer term any advantage is largely wiped out by the higher cost of imported materials and the prospect of consumers around the world simply buying less.

Indeed, the government and the central bank expect South Korea to produce its first full-year current account deficit this year since the Asian financial crisis after the spiral higher in raw materials prices.

The main Seoul stock exchange initially fell, following Monday's sharp drop, but moved into positive territory later.

By 0451 GMT, the main index <.KS11> was up 0.5 percent, though it was still close to a two-year low and down almost 30 percent so far this year.

Regulator Rhee said the government was ready to bring in additional measures to stabilize the stock market.

Local bonds benefited as investors shifted their money out of risky assets into debt but traders said the won's rapid fall meant there was limited appetite for even this market.

One major ratings agency, Fitch Ratings, said that South Korean banks looked more at risk than others in the region to the global credit crunch.

"There are clearly some vulnerabilities in the banking system with respect to external funding needs, which are all the more important since international credit markets are not functioning normally," James McCormack, head of its Asia-Pacific sovereign ratings, told Reuters in an email interview.

"But we see no reason to change Korea's ratings," he said.

(Additional reporting by Seo Eun-kyung, Park Jung-youn, Yoo Choonsik, Writing by Jonathan Thatcher; Editing by Neil Fullick)