South Korea's currency gained 2.2 per cent on Friday, a day after suffering its worst one-day plunge for a decade, but fears remained that the country might become Asia's first victim of the global financial crisis.

The won initially gained 5 per cent against the dollar before it was hit by sliding stock prices. The won stood at 1,343.4 per dollar at 0126 GMT, up 2.2 per cent from Thursday's domestic close of 1,373.0, after rising to as high as 1,305.9.

Seoul shares extended their losses on Friday to fall more than 3 per cent to their lowest since Nov. 2005.

On Friday, when the won slid by 9.7 per cent, the country's top financial regulator called for concerted efforts to stabilise financial markets and boost the real economy by injecting liquidity into the banking sector and cutting interest rates.

"It is time for all the different policy authorities to join forces toward one direction of stabilising the economy and financial markets," Jun Kwang-woo, head of the Financial Services Commission, told parliament.

Mr Jun said financial markets would remain under pressure until the middle of next year as domestic banks faced increasing difficulties borrowing overseas. "Problems with foreign currency liquidity have been worsening. The current situation will go on for a while and will continue at least through the first half of next year," he said.

Mr Jun's comments came as financial markets were upset by Standard and Poor's, the international ratings agency, which put seven Korean banks on its negative watch list, citing growing foreign currency funding pressure.

The move prompted risk-averse investors to dump Korean shares, pushing the benchmark Kospi stock index 9 per cent lower for its biggest daily loss in seven years. The won has lost about 30 per cent of its value so far this year, in spite of support from the central bank.

In a further sign of the growing stress in the financial system, the cost of protecting the country's external debt from default rose sharply. Five-year credit default swap contracts rose by more than 40 basis points on Thursday to 330, according to Bloomberg.

The price, which means it costs $330,000 a year to protect $10 million in debt, has almost quadrupled since its recent low of about 86 basis points at the end of July. By contrast, Japanese CDS prices have remained steady over the same period at below 35 basis points.

The liquidity crunch prompted calls for the government to provide a guarantee for bank debts to encourage interbank lending. "The government should show a strong determination for market intervention by providing a guarantee for local banks' dollar borrowings," said Chun Jong-woo, economist at Standard Chartered.

Oh Suk-tae, economist at Citibank, said there was "no doubt" that foreign banks were reducing credit lines to Korean banks.

"We thought that the worst was over as the markets showed some stability over the past days. But we were wrong," said Mr Oh. "The credit crisis is hitting Asia and investors have no confidence in the government's measures."

The government has injected about $15bn into local banks and companies since late September to ease credit problems and says that more will be made available, although the amount is not clear.

Thursday's financial turmoil rekindled memories of the Asian financial crisis, which forced Korea to seek a $57bn bailout from the International Monetary Fund as the currency lost half its value.