SEOUL - SOUTH Korean exports and imports shrank more than expected in December as the global economic crisis shredded demand at home and abroad, and the government said exporters faced their toughest year since 2001.

Crumbling markets for Korean cars, ships and electronics and shrivelling domestic demand are piling pressure on the central bank to cut interest rates again to cushion an economy that analysts say may shrink in 2009 for the first time in a decade.

Exports from Asia's fourth-largest economy fell 17.4 per cent to $27.29 billion($39.7 billion) in December while imports dropped 21.5 per cent to $26.62 billion (S$38.7 billion), the Ministry of Knowledge Economy said.

The numbers reinforced the case for a rate cut next week of between a quarter and half a percentage point from a record low 3 per cent, said Mr Park Sang hyun, chief economist at HI Investment & Securities.

'I expect the Bank of Korea to lower rates to 2 per cent by the end of the first half, but we may see lower rates than that as the economy may post negative growth in the first quarter,' Mr Park said. The Bank of Korea meets on Jan 9 to review policy and has slashed interest rates by 2.25 percentage points in two months.

The won currency fell more than 5 per cent against the dollar after the export data. March treasury bond futures fell 15 ticks to 112.46 by 0132 GMT. The stock market's benchmark KOSPI was down a slight 0.4 per cent.

Korean stocks and bonds and the won were hammered last year as investors fled riskier assets after global financial crisis led to bank failures in the United States and pushed most industrial economies into recession.

Trade surplus next year The economy ministry said it expected exports to grow just 1 per cent in 2009, the slowest pace in eight years. Imports would fall 4.7 per cent, it said.

The slump in imports, driven by both falling domestic demand and a drop of 70 per cent in cost of oil since July, will help South Korea run a trade surplus of $11.9 billion surplus in 2009, the ministry said.

The 2008 trade deficit of $13 billion was the biggest since in 1996.

South Korea sends more than one-fifth of total exports to China. Officials have said about half that number is re-exported to markets such as the United States, Europe and Japan which are all in recession.

The global economic slump has added urgency to the reform debate in South Korea. The ruling, conservative Grand National Party, says it wants to pass 85 bills that include easing rules on bank ownership to help the economy through the slowdown.

But dozens of reforms have been blocked because of squabbling politicians. Much of the row centres on a free trade bill with the United States.

The Bank of Korea forecast South Korea's economy would grow 2 per cent in 2009 from an estimated 3.6 per cent in 2008.

But analysts at banks, including UBS, have warned the economy would probably shrink by as much as 3 per cent in 2009, which would be the first annual contraction since the Asian financial crisis a decade ago.

The central bank governor said on Wednesday interest rate policy in 2009 would be aimed at supporting economic recovery and keeping financial markets stable. -- REUTERS