SEOUL - Navies from the rival Koreas exchanged gunfire for the first time in seven years on Tuesday, damaging vessels on both sides and raising tension just days before President Barack Obama travels to Asia.

North Korea has often used military action to force its way onto the agenda of major diplomatic events and has been seeking direct talks with Obama's administration while alarming global powers by last week saying it had produced more arms-grade plutonium.

The United States will announce in the next few days whether it will start direct talks with the North which could kickstart a fresh round of talks with regional powers on nuclear disarmament, a U.S. official said earlier.

South Korea denounced what it said was an incursion by a North Korean patrol vessel into its territorial waters in the Yellow Sea that sparked a brief firefight near the spot where the two Koreas have had two deadly conflicts in the past decade.

There were no casualties in the incident that left a South Korean vessel pockmarked with about a dozen gunshots and apparently a North Korean patrol vessel heavily damaged, military officials said.

North Korea is taking this aggressive stance to show they're not backing down on their security, said Yang Moo-jin, a professor at the South's University of North Korean Studies.

The North's saber rattling is often seen by analysts as an means to increase its leverage in negotiations.

It accused the South of starting the latest fray.

The South Korean military authorities should make an apology to the North side for the armed provocation, the North's KCNA news agency quoted a military official as saying.

DISPUTED SEA BORDER

The South's Joint Chiefs of Staff said a North Korean patrol vessel went about 1.3 km (0.7 miles) into waters claimed by the South. The South issued verbal warnings and fired warning shots. The North responded by opening fire on the South's vessel.

We fired back, the South said in a statement, adding the North's vessel then retreated.

North Korea in the past year has threatened to attack the South's ships if they come near the Northern Limit Line (NLL), a Yellow Sea border set unilaterally by U.S-led U.N. forces at the end of the 1950-53 Korean War that the North sees as invalid.

The two Koreas are technically still at war because their conflict ended with a ceasefire and not a peace treaty.

The South Korean won briefly retreated on the news. There was no noticeable impact on bonds while foreign investors kept up their buying spree of local equities.

We will have to see what the incident means and how it came, but it's unlikely to have a lasting impact, said Choi Chang-ho, a market analyst at Shinhan Investment Corp.
Investors have grown used to the North's saber rattling, but incidents such as this sour the mood and remind market players of the security threat North Korea poses to North Asia, which accounts for one-sixth of the global economy.

(Additional reporting by Rhee So-eui, Christine Kim and Seo Eunkyung; Editing by Jonathan Thatcher and Ron Popeski)

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