The threat of war over North Korea's nuclear programme is the biggest threat to South Korea's economy in 2003, the head of the central bank has warned.

"The North Korean nuclear issue is the biggest problem as it may check the economic growth (of South Korea)," said the central bank's governor Park Seung.

The Bank of Korea's growth target of 5.7% would be threatened if tensions escalated too far and the economy could even contract.

In December, North Korea reactivated its plutonium-based nuclear program, under the auspices of power generation, after the US stopped oil shipments to the country.

The US claims North Korea - which has no domestic crude oil supplies - is really using the reactors to arm nuclear weapons.

No rate cut

A war with Iraq, which has fuelled a sharp rise in oil prices, and the weak global economy are the other risks in 2003, said Mr Park.

Despite the uncertainty, a interest rate cut was not in the offing, he added.

The bank's board left rates near record lows at 4.25% in December and will meet again next Thursday.

Surging oil prices pushed South Korea's imports to a record high in December, cutting the trade surplus to $704m from $1.2b in November, the Commerce Ministry said on Wednesday.

South Korea, like its northern neighbour, also imports all of its crude supplies.

In 2002, the trade surplus reached $10.8bn from $9.3bn in the previous year fuelled by the hi-tech and automotive sectors and strong demand from China.

More warnings

The central bank warning echoes those of the commercial banking sector.

"Operational difficulties are growing bigger," said Kim Jung-tae, the chief executive of South Korea's biggest lender, Kookmin, in a new year's message.

The growth threat of war has led companies to shelve or cut investment plans and could scare of foreign investors.

"The environment for operation will be more tough because of growing uncertainties," said Ra Eung-chan, chief of Shinhan Finance, the country's fourth largest lender.

The economy is already projected to grow more slowly in 2003 than last year's 6.2%.

In mid-2002. South Korea was the first Asian country to fully repay its bail-out loans after the regional economic crisis in the late 1990s.