South Korean and U.S. troops began annual military drills on Monday and North Korea said it had put its armed forces on full combat readiness in response to the exercises.

Pyongyang has also warned of war if what it calls a satellite launch is shot down.

The North Korean army said in a statement the drills were a "provocation" that would only occur "on the eve of a war", and cut off a telephone hotline with the South's military.

Some intelligence analysts believe that the satellite is cover for a long range missile test.

Pyongyang regularly accuses the United States and South Korea of aggressive intentions before the exercises, which have been held for years without major incident.

Meanwhile North Korean media has been more strident about these drills, which come as Pyongyang is making preparations to test-fire its Taepodong-2 missile and at a time of speculation about the health of North Korean leader Kim Jong-il.

North Korea has repeatedly said it is preparing to launch a satellite as part of a peaceful space programme.

"Shooting our satellite for peaceful purposes will precisely mean a war," a spokesman for the North's Korean People's Army said in a statement carried by the official KCNA news agency.

The military drills are scheduled to run until March 20, and are longer and on a greater scale than in previous years.

South Korea urged its neighbour to reopen the military hotline immediately, while financial markets in Seoul brushed off the latest sabre-rattling by Pyongyang as little more than rhetoric.

"Unless more drastic actions are taken by the North, such as a missile test, investors will remain unfazed by these issues," said Yoo Soo-min, a market analyst at Hyundai Securities.

Kim's successor

North Koreans voted on Sunday in tightly controlled elections for a new parliament and Kim was re-elected as a deputy with 100 percent of the vote from his Pyongyang constituency, KCNA said.

No other results have been announced but South Korea's Yonhap news agency has claimed Kim's youngest known son, Kim Jong-un, was running in the election. That would signal Jong-un's emergence as a possible successor to Kim.

Yonhap has previously reported that the 67-year-old Kim has named Jong-un as his successor. Some analysts on North Korea have said there was little evidence any choice had been made yet.

In Seoul, the new U.S. special envoy for North Korea, Stephen Bosworth, was holding talks with South Korean officials on how to restart negotiations on ending the North's nuclear arms programme. Bosworth is on a tour of North Asian capitals.

Six-party talks aimed at coaxing Pyongyang to carry out nuclear disarmament have been under way for several years.

The two Koreas are technically still at war and station about 1 million troops near their respective sides of the Demilitarised Zone that has divided the peninsula since the 1950-53 Korean War ended in a ceasefire, but not a peace treaty.

Reuters