YEONPYEONG, South Korea (Reuters) - North Korea on Monday said it had put its armed forces on full combat readiness in response to the start of annual military exercises by U.S. and South Korean troops, raising tension on the divided peninsula.

In a statement read on state television, a fierce-voiced military official also warned that any attempt to shoot down the long-range missile the reclusive state plans to launch soon would be seen as an act of war.

Pyongyang routinely accuses the United States and South Korea of aggressive intentions with the exercises, but the rhetoric this time has been more strident.

It called the drills a provocation that would only occur on the eve of a war, and threatened to cut off its hotline with the South's military -- the one telephone link between the two armies who are massed either side of the border that has divided them for more than half a century.

U.S. marines will conduct live-fire drills north of Seoul and within an hour's drive from the border. A U.S. aircraft carrier will take part in the exercises, the U.S. military said.

The drills come as Pyongyang prepares to test-fire its Taepodong-2 missile and at a time of speculation about the health of North Korean leader Kim Jong-il.

Pyongyang says the launch would be for a satellite as part of its communications development, though under U.N. sanctions it is barred from firing a ballistic missile.

Shooting our satellite for peaceful purposes will precisely mean a war, a spokesman for the Korean People's Army said on North Korea's one television channel.

Media reports last week speculated that Japan and the United States might intercept any ballistic missile launched by the North, though neither has said publicly it would.

Both countries, and South Korea, have said they see no difference between a satellite and a missile launch because they use the same technology and the same rocket.

In the disputed waters off the west coast of the peninsula there was no sign that the North was about to match its rhetoric with action.

I hope that (South Korean) President Lee Myung-bak takes an easier line with North Korea. It will makes things easier for people on the island, said Cho Hee-ju, visiting her husband on Yeonpyeong island, just 11 km (7 miles) from the North and the scene of deadly skirmishes between the two Korean navies in the past -- most recently in 2002.

Much of the verbal fury from Pyongyang over the past few months has been directed at the conservative South Korean leader who, in his first year in office, has all but cut off aid to the impoverished North over its ambitions to produce nuclear weapons.

The touch-and-go situation in which a nuclear war may break out at any moment is prevailing on the Korean peninsula and the destiny of the nation is exposed to threat owing to the reckless moves of the Lee Myung Bak bellicose group, the North's communist daily Rodong Sinmun said.

Last week, the North said it could not guarantee the safety of South Korean civilian aircraft flying near its airspace as it readied to launch the missile. That forced several airliners to change their routes.

South Korea's financial markets, normally immune to North Korean rhetoric, brushed off the latest outburst as more saber-rattling.

The Seoul stock market outperformed its counterparts in both Tokyo and Shanghai, boosted by news that LG Display would build a new production line at its Paju factory just minutes from the heavily armed border. The recently tumbling won currency also rose.

Unless more drastic action is taken by the North, such as a missile test, investors will remain unfazed by these issues, said Yoo Soo-min, a market analyst at Hyundai Securities.


The poor health of North Korean leader Kim -- it is widely believed that he suffered a stroke in August -- has triggered speculation over who might eventually take over a nation that tested its first nuclear device in 2006. U.S. Secretary of State Hillary Clinton last month warned of a possible power struggle.

But there was no sign that the head of the world's first communist dynasty might be losing his iron grip on power. In Sunday's tightly controlled elections for a new parliament, Kim was re-elected as deputy with 100 percent of the vote in his Pyongyang constituency, North Korean state media reported.

None of Kim's three known sons figured in the list of 687 delegates elected to the Assembly, read out on the North's official KRT television late on Monday. The youngest son, Jong-un, was seen as a possible successor and news reports have said he might run.

In Seoul, the new U.S. special envoy for North Korea, Stephen Bosworth, held talks with South Korean officials on how to restart negotiations on ending the North's nuclear arms program. Bosworth is on a tour of North Asian capitals.

The two Koreas are technically still at war and station about 1 million troops near their respective sides of the Demilitarized Zone that has divided the peninsula since the 1950-53 Korean War ended in a ceasefire, but not a peace treaty.

(Additional reporting by Jack Kim and Jungyoun Park, writing by Jonathan Thatcher; Editing by Jeremy Laurence and Sanjeev Miglani)