Markets slide on N Korea attack

The fiercest North Korean attack on the South in decades, which killed two soldiers on a South Korean island, knocked Asian stocks and European shares fell to their lowest level in over three weeks.

North Korea fired dozens of artillery shells at a South Korean island, killing two soldiers.

South Korea then returned fire.

The news broke just before the end of Asian trade - and sent the Korean won tumbling.

It also knocked global markets which are already unsettled by Ireland's debt crisis and worries about the state of the euro zone.

In Europe, investors dumped equities and moved to less risky assets like gold and the dollar, although Germany's Dax recovered some early losses.

Fidel Helmer, Head trader at Hauck & Aufhauser, saying :

"We started today with some weaker trading but we cannot say whether this was as a result of the crisis between North and South Korea, or Portugal, Spain or Ireland. On the other hand we have seen some very friendly prices and of course at times there are technical reactions but what is certain is that we could do without the kind of crisis like the one between North and South Korea during the times of the financial crisis."

The shelling took place as Chinese and Russian leaders held talks in St Petersburg.

They're among many foreign powers who have expressed concern about the latest flare up on the Korean peninsula.

China - North Korea's only major ally - has called for a return to six party talks on Pyongyang's nuclear weapons programme.

Alistair Newton, a political analyst at Nomura says China should help reduce tension between the Koreas.

Alistair Newton, Political analyst, Nomura, saying:

"The Chinese certainly need to bring pressure to bear on Pyong Yang and are quite capable of doing that. And Lee Myung-bak has already been taking important steps in South Korea, to try to defuse the situation, saying that they are looking to defuse tensions. Let's hope that we can continue down the appropriate track there and get this situation back under control quickly."

Experts say North Korea's leadership has acted calculatedly and provocatively for decades as it has looked to strengthen its hand in negotiations.

This attack comes as Pyongyang is looking to return to talks about its nuclear weapons programme.

Joanna Partridge, Reuters