Geopolitical uncertainty over the death of North Korean dictator Kim Jong-il spooked South Korea's stock market on Monday, sending the main index down nearly 3.5 per cent.

The Korea Exchange's benchmark KOSPI index closed down 3.43 per cent to 1,776 points on the day. Earlier, it had been as much as 4.86 per cent lower following news of the leader's death.

Individual stocks, including some of Korea's biggest corporate names, were hit harder. Hyundai P&C, a division of Korean conglomerate Hyundai that makes paints and surface coatings, was down nearly 10 per cent. Samsung Heavy Industries was off 5.4 per cent, while Korean Air Lines tumbled 7.5 per cent. 

The KOSPI's largest ever single-day loss was on Sept. 12, 2001, when it fell more than 12 per cent following the attacks the day before on the World Trade Center in New York and the Pentagon.

Worries were also acute in Japan, where the Nikkei index shed 1.26 per cent. Both South Korea and Japan have often been the targets of the North's mercurial military and diplomatic actions.

"We're seeing deeper negative sentiment in some markets," said Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. "Basically this is because risk aversion on the geopolitical front has increased given that there's a transition of power in a relatively unstable country. So we're seeing an impact on equities, currencies."

Oil was slightly higher, with the futures contract for January delivery up 23 cents to $93.76 a barrel in New York.

South Korea's currency was also down, with the won losing 1.6 per cent against the U.S. dollar.

'Unlikely' to be short-term

Kim Jong Il's death, announced Monday by North Korean state television, raises the spectre of more instability on the divided Korean peninsula as the reclusive regime undergoes a leadership succession.

South Korea's military and police went on alert and President Lee Myung-bak, convened a national security council meeting

North Korea's official Korean Central News Agency on Monday identified his third son, the twenty-something Kim Jong Un, as the "great successor" to the man known officially as the "Dear Leader."

pi-kim-jong-un-ap

Who will rule?

Read CBC's profile of North Korea's heir apparent, Kim Jong-un.

But even with the younger Kim designated as his father's successor, and already filling high-ranking posts, some experts fear a behind-the-scenes power struggle or nuclear instability.

"Particularly with the bearish market sentiment now, any negative news will make the market much more gloomy," said Kwong Man Bun, chief operating officer at KGI Securities in Hong Kong. The Hong Kong benchmark dipped 100 points after North Korea's announcement, which "reflects concern over potential political instability," he said.

The threat of full-blown hostilities between the two Koreas — which are technically still at war since they only signed an armistice, and not a peace treaty, in 1953 — has always loomed over the South Korean market. When the countries' navies fired on each other on June 15, 1999, the KOSPI index lost almost four per cent.

In that case, the market staged a comeback shortly thereafter, but analysts warned that the North Korean leader's death could cast a longer shadow.

"Kim's death will be different from the past, and it is unlikely to have a short-term impact on the market," Daishin Securities analyst Oh Seung-hun told Yonhap, South Korea's main news agency. "Investors should take to the sidelines and wait and see how things will develop."

In North America, the main Toronto index was down 95 points or 0.8 per cent to 11,539 when markets closed on Monday, while the Dow Jones was off almost one per cent to 11,766.

With files from The Associated Press