Oct. 9 (Bloomberg) -- The Japanese yen, the South Korean won and Asian stocks declined after North Korea said it had carried out a nuclear weapons test, raising the prospect that the United Nations will threaten a military response.

The yen fell to an eight-month low of 119.30 per dollar, from 118.83 before North Korea's government-controlled news agency reported the test. The won had its biggest drop since Dec. 8, 2004, slumping 1.6 percent to 963.90 at the 3 p.m. close of local trading, according to Seoul Money Brokerage Services Ltd. South Korea's Kospi stock index slid 2.4 percent to 1319.40.

``Global investors are forced to be concerned about the region's security,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. ``The possibility cannot be ruled out that the U.S. might take military action against North Korea, which could cause serious damage to regional economies.''

The U.S. will seek ``immediate action'' from the United Nations Security Council, White House spokesman Tony Snow said. Japan's Foreign Minister Taro Aso said his nation will take ``decisive'' steps. China's government called for calm after condemning its neighbor for ``brazenly'' ignoring global opinion.

North Korea has ``safely and successfully conducted an underground nuclear test,'' the Korea Central News Agency said, without giving details. The trial, the first announced by the government, gives the country ``a powerful, self-reliant defense capability.''

The yen traded at 119.07 at 18:32 p.m. Tokyo time, from 119.01 late in New York on Oct. 6. Gold for immediate delivery rose 1 percent to $579.72 an ounce.

Tremor Measured

The Morgan Stanley Capital International Asia-Pacific excluding Japan Index fell 0.9 percent to 343.12, as Samsung Electronics Co. declined. Europe's Dow Jones Stoxx 600 Index lost 0.2 percent to 344.99 in London. Standard & Poor's 500 Index futures expiring in December slid 3.1 to 1355.7. Japan and Taiwan markets were closed for public holidays and the U.S. bond market was shut for Columbus day.

South Korea detected a 3.58 to 3.7 magnitude tremor in the northeastern North Korean town of Musudan-ri at 10:35 a.m., presidential spokesman Yoon Tai Young said in Seoul.

Musudan-ri is the base from which the nation unsuccessfully tested the Taepodong-2 long-range ballistic missile on July 5. The yen slid 0.8 percent on the day of that launch.

``A nuclear test is different from just firing missiles,'' said Yang Jeung Won, who oversees about $2.1 billion as chief investment officer at Samsung Investment Trust Management Co. in Seoul. ``North Korea is making its neighbors very nervous because unlike before, they don't look that eager to talk things out.''

China Reaction

The U.S. and Japan have been joined by South Korea, China and Russia in talks aimed at getting Kim Jong Il's regime to scrap the nuclear program. North Korea, which walked out of six- nation negotiations in November 2005, said it planned the test on Oct. 3.

China's foreign ministry said in a statement that it ``firmly opposes'' the test. It asked parties to the talks to remain calm and resolve the crisis through dialogue.

U.S. ambassador to the UN, John Bolton, on Oct. 4 pledged the threat of military action should North Korea detonate a nuclear bomb. An Oct. 6 UN statement, drafted by Japan, said any test would be a ``threat to international peace and security,'' the standard for future Security Council action.

``It depends on what kind of steps Japan, China and the U.S. will take, but it's bad for sentiment,'' said Hans Goetti, a managing director in Singapore at Citigroup Private Bank, which oversees $1.5 billion in Asia. ``In the long term, markets are driven by economic performance. We don't think foreign investment will dry up'' in South Korea.

`Dangerous Scenario'

South Korea, still technically at war with the North since their 1950-53 conflict ended without a peace agreement, called the test an ``unacceptable provocation'' and raised its military alert level.

The perception of South Korea's credit quality deteriorated. The price of credit-default swaps based on $10 million of South Korea's dollar-denominated debt rose to $31,000 per year from $27,000 Oct. 6, according to UBS AG prices.

The five-year contracts, which protect bondholders against default, pay the buyer face value in exchange for the notes should the government fail to meet its obligations on time.

``This has now been taken to a different dimension, a much more dangerous scenario,'' said John Teng, head of Asia credit research for Nomura International Hong Kong Ltd. ``It will make it more difficult for new issuers to come to the market.''

The yield on the benchmark three-year government note rose 1 basis point to 4.58 percent, according to Korea Exchange. A basis point is 0.01 percentage point.

Rating Agencies

South Korea's credit rating won't be affected ``as long as North Korean geopolitical risks remain contained,'' said Thomas Byrne, New York-based senior credit officer at Moody's Investors Service. Takahira Ogawa, a director at Standard & Poor's in Singapore, said the outlook depends on the ``future course of action by the international community.''

S&P raised South Korea's foreign-currency credit ratings one level to A in July 2005, the highest for the Asian nation since an International Monetary Fund bailout in November 1997. Moody's in April raised its outlook for South Korea's A3 rating, the seventh highest investment grade.

To contact the reporter on this story: Jake Lee in Hong Kong jlee127@bloomberg.net

Last Updated: October 9, 2006 05:34 EDT