Oct. 27 (Bloomberg) -- The Bank of Korea slashed interest rates by a record at an emergency board meeting in an attempt to bolster markets as the nation faces its biggest crisis since requiring an International Monetary Fund bailout 10 years ago.

Governor Lee Seong Tae cut the seven-day repurchase rate 75 basis points to 4.25 percent, the central bank said in a statement in Seoul today. The bank also broadened the type of bonds it will accept as collateral in money-market operations, giving lenders access to more funds.

The Kospi stock index slumped on concern the rate cut won't prevent the economy from slowing and could add more pressure on the weakening won. President Lee Myung Bak, who met Finance Minister Kang Man Soo and the central bank's Lee yesterday, said today the country is far from experiencing a repeat of the 1997 financial crisis when it needed a $57 billion loan from the IMF.

``The Korean authorities felt compelled to take dramatic action in the face of global turmoil,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``The rate cut might provide a brief boost to the financial market but the general panic environment prevails.''

The central bank also cut rates on special loans for small- and medium-sized companies to 2.5 percent from 3.25 percent.

South Korea's Kospi stock index fell 1.4 percent to 925.41 at 1:35 p.m. in Seoul, after earlier rising as much as 3 percent. The index plummeted 20 percent last week in its worst week since 1997. The won sank to 1,440 against the dollar from 1,424, extending this year's drop to 36 percent.

Japan's Measures

``What we urgently need is stabilization of the currency and a drop in risk premiums paid to investors when local companies raise funds overseas,'' said Song Seong Yeob, a fund manager at KB Asset Management Co. in Seoul. ``The interest rate cut doesn't directly cover such issues. Rather, it will trigger a further decline of the won's value against the dollar.''

The Bank of Korea said the ``large cut was called for in order to guard securely against the possibility of a sharp contraction of real economic activity,''

Governor Lee hinted at further rate cuts, saying the bank will ``maintain a stance to pay more attention'' to the risk of slower economic growth. Inflation is likely to ease on weak domestic demand and falling oil prices, he said.

``The Bank of Korea will likely cut rates again at their monthly rate-setting meeting next week,'' Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. ``The Bank of Korea seems determined to stop the market panic from the U.S. financial crisis spreading.''

Currency Rules

The bank said today it would also ease rules to make it easier for exporters to borrow dollars. Also, small businesses that borrowed mostly in Japanese yen can extend their foreign- currency loans for another year, it said. The won has fallen 47 percent against the yen this year.

The bank last week raised the limit on so-called total loans to 9 trillion won ($6.2 billion) from 6.5 trillion won. Total loans are offered to commercial banks at a rate lower than the benchmark rate, with the funds earmarked for small and medium- sized businesses.

President Lee held the emergency meeting on returning from a Beijing gathering of Asian and European leaders at which they called for an overhaul of World War II-era banking rules. It was the first meeting of Asian and European Union chiefs since calls for coordinated action mounted amid bank failures and plunging stock prices that began in September.

South Korea last week pledged $130 billion to support lenders struggling to obtain foreign funds and said it will spend as much as 8 trillion won to rescue builders struggling with unsold homes. The central bank said Oct. 24 it will inject 2 trillion won into the financial system through repurchase- agreement operations.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

Last Updated: October 27, 2008 00:43 EDT