North Korea's military Tuesday threatened "strong physical retaliation" against a South Korean naval exercise set to start this week in the Yellow Sea.

The South is staging the anti-submarine drill from August 5-9, involving the army, navy, air force and marines, in response to what it says was a deadly North Korean torpedo attack on a warship.

It follows a major US-South Korean naval and air exercise held last week in the Sea of Japan (East Sea) as a warning to the North.

Pyongyang threatened nuclear retaliation for last week's drill but it passed without incident.

The military's western command, in a notice quoted by the official news agency Tuesday, described this week's South Korean exercise as a "direct military invasion".

"In view of the prevailing situation, the (western command) made a decisive resolution to counter the reckless naval firing projected by the group of traitors with strong physical retaliation," it said in a reference to South Korea.

The disputed maritime border in the Yellow Sea has been the scene of several naval clashes. In March, a South Korean corvette sank in the area with the loss of 46 lives.

South Korea, the United States and other countries, citing findings of a multinational investigation, said a North Korean submarine had fired a heavy torpedo in an attack which broke the warship in two.

The North vehemently denies responsibility, calling the allegations a "smear campaign" to provide a pretext for aggression.

It refuses to recognise the sea border drawn by United Nations forces after the 1950-53 war, insisting it should run further to the south, and repeated this stance Tuesday.

The North's military warned civilian ships including fishing boats not to enter the area of naval firing fixed by the South, which it said would be close to five islands near the border.

"It is the unshakable will and steadfast resolution of the army and people of the DPRK to return fire for fire," it said.

The South's Joint Chief of Staff said marines stationed on islands near the border would stage live-fire exercises but naval ships would stay far south of the line.

The North routinely denounces joint military exercises south of the border as a rehearsal for war, while the United States and South Korea say they are purely defensive.

Some 28,500 US troops are based in the South.

earlier related report
US, S.Korea discuss sanctions amid warning from N.Korea
Seoul (AFP) Aug 3, 2010 - US and South Korean officials held more talks Tuesday about tightening the sanctions screws on North Korea, as Pyongyang's military threatened to hit back at an upcoming South Korean naval exercise.

Some 10 US officials led by Robert Einhorn, State Department special adviser for non-proliferation and arms control, met senior finance ministry officials.

"The US side briefed us on financial sanctions against the North and Iran and they asked for Seoul's help," Kim Ik-Ju, director of the ministry's international finance bureau, told journalists.

"US officials spent much of the time explaining about sanctions against Iran."

Also at the talks was Daniel Glaser, a senior Treasury official overseeing efforts to combat terrorist financing and financial crimes. He and Einhorn were to leave for Japan later Tuesday.

During a visit to Seoul last month, US Secretary of State Hillary Clinton announced plans to tighten existing sanctions and impose new measures on the North.

They are designed both to punish the North for the alleged sinking of a South Korean warship and to pressure it to scrap its nuclear weapons programme.

Seoul and Washington accuse Pyongyang of torpedoing the ship in March with the loss of 46 lives, a charge it vehemently denies.

South Korea and its US ally held a major naval and air exercise last week to deter cross-border aggression and Seoul will launch its own five-day anti-submarine drill Thursday in the Yellow Sea.

The North's military western command Tuesday described the upcoming exercise as a "direct military invasion".

"In view of the prevailing situation, the (western command) made a decisive resolution to counter the reckless naval firing projected by the group of traitors (South Korea's government) with strong physical retaliation," it said.

The communist state made similar threats against last week's joint exercise in the Sea of Japan, which passed without incident.

Einhorn and Glaser Monday announced plans which could cut off companies and individuals accused of sanctions-busting activities from the international financial system.

Einhorn, in an apparent "name and shame" policy, said Washington would blacklist such entities and individuals and block any property or assets they possess in the United States.

"By publicly naming these entities, these measures can have the broader effect of isolating them from the international financial and commercial system," he said Monday.

In 2005 Washington blacklisted Macau's Banco Delta Asia (BDA) for allegedly handling the North's illicit funds.

The move led to a freeze of 25 million dollars in the North's accounts there and intimidated other banks from doing business with Pyongyang.

Some analysts questioned the effectiveness of fresh financial sanctions, saying North Korea might already have adapted to its painful BDA lesson.

They said the measures were not expected to have much direct impact on the North, which conducts few financial transactions in the United States.

But Glaser said Monday the new curbs would work since "banks throughout the world saw what happened in the BDA case and decided that they were going to be very seriously re-examining the financial relationship with North Korea".

Professor Kim Yong-Hyun of Seoul's Dongguk University said the new US sanctions would merely have a symbolic effect since China remains reluctant to hit its ally North Korea hard.

"The US rhetoric sounds harsh but Washington itself does not want to squeeze the North too hard," he told AFP.

"When the dust whipped up by the sinking incident begins to settle in a month or two, the atmosphere will shift toward dialogue," Kim said, predicting that six-party nuclear disarmament talks could resume in the autumn.

North Korea in April last year stormed out of the talks and carried out its second nuclear test a month later.