July 13 (Bloomberg) -- South Korea’s won and the Kospi stock index both posted their biggest slides since March after a television report that North Korean leader Kim Jong Il is terminally ill.

The won dropped to a two-month low as overseas investors cut their holdings of the nation’s shares by the most since April 8. Kim, who has yet to announce a successor, is suffering from pancreatic cancer and has less than five years to live, Seoul-based YTN television reported, citing unidentified intelligence officials in China and South Korea. The North has in the past two months tested a nuclear bomb, fired missiles into the waters off its coast and threatened to attack the South.

“The currency and stocks responded sharply to Kim Jong Il’s rumored illness, which may increase uncertainty over the Korean peninsula,” said Christian Jin, a fund manager at HI Asset Management Co. in Seoul, which oversees the equivalent of $7.7 billion in assets. “The issue may hang over markets in the short-term, as will a correction in global shares.”

The won declined 2.6 percent to close at 1,316.50 per dollar in Seoul, according to data compiled by Bloomberg. That’s the weakest it’s been since April 30. The Kospi fell 3.5 percent, while the MSCI Asia-Pacific Index of regional equities slid 2.5 percent.

Kim may have only one more year to live as his health deteriorates, the Washington Times reported on its Web site on July 10, citing an unidentified U.S. official. The 67 year-old leader, who has made only two public appearances this year, is close to transferring control of the communist nation to his youngest son, Kim Jong Un, a South Korea official said June 24 on condition of anonymity.

Risk Premium

“If Kim Jong Il is truly gone, which given this news it seems like something that might happen quite soon, people will need to rethink the whole situation,” said Daniel Hui, a foreign-exchange strategist at HSBC Holdings Plc in Hong Kong. “This could increase the risk premium that needs to be priced into Korean assets in the near term.”

Overseas investors sold a net 228 billion won ($173 million) of Korean stocks today, exchange data show.

Samsung Electronics Co., South Korea’s biggest stock by market value, retreated 3.9 percent to 620,000 won, while Hyundai Motor Co., the largest carmaker, lost 3.2 percent to 74,800 won. Good People Co., an underwear maker that has a factory in North Korea, fell 5.1 percent to 1,495 won.

Government bonds also declined, pushing the yield on the benchmark five-year note up from a two-month low.

The yield on the note due March 2014 climbed two basis points, or 0.02 percentage point, to 4.43 percent, according to Korea Exchange.

South Korea sold 2.177 trillion won of five-year government bonds at a yield of 4.44 percent, the Ministry of Strategy and Finance said.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net Saeromi Shin in Seoul at sshin15@bloomberg.net

Last Updated: July 13, 2009 03:08 EDT