* Euro falls as euro zone debt problems come into focus
* Korean peninsula tension helps dollar
* Markets on edge over Ireland (Updates prices, adds detail)
NEW YORK, Nov 23 (Reuters) - The dollar rose for a second straight day on Tuesday after a shelling exchange in the Korean peninsula added to the greenback's safe-haven allure as did growing concern about Europe's debt crisis.
German Chancellor Angela Merkel said Ireland's crisis was different to Greece's but just as worrying and the euro was in an "exceptionally serious" situation.
Comments by German Finance Minister Wolfgang Schaeuble that the future of the euro zone currency was at stake due to the Irish debt crisis further pressured the euro.
A shelling exchange in the Korean peninsula, after North Korea fired artillery shells at a South Korean island, exacerbated the risk aversion ruling financial markets and added to pressure on the euro. The North Korean shelling killed two soldiers and set dozens of houses ablaze, and the South Koreans returned fire, military and South Korean media reported.
The dollar rose 3.5 percent against the South Korean won to its highest since early September.
"We're seeing a knee-jerk reaction to Korea but the underlying story is still the European debt crisis and contagion fears," said John Doyle, strategist at Tempus Consulting in Washington. "That will drive trading for the rest of the month. Korea is a sideshow."
The euro was down 1.8 percent on the day at $1.3376, after shedding around half a cent when the Korean clash was reported. The session low was $1.3370 on electronic trading platform EBS data, and the percentage decline the largest since August at current prices.
Against the yen, the dollar was down 0.5 percent at 82.84 yen, having risen as high as 83.85 yen.
The dollar index was up 1.2 percent at 79.625, close to its intraday high of 79.642.
The euro's fall against the dollar extended after U.S. data showed sales of previously owned homes fell more than expected in October, increasing risk aversion. The euro fell below $1.3438 against the dollar, a 50 percent Fibonacci retracement of its August through November rally, according to EBS data.
EURO WOES
Many investors are not convinced that an EU/IMF rescue package for Ireland will prevent other heavily indebted members of the 16-country bloc from seeking aid, and Portugal and Spain are seen as the next weakest links.
An official from Portugal's main opposition party said it would allow passage of the minority Socialist government's 2011 budget in the final vote on Nov. 26.
However, Spain's short-term cost of borrowing almost doubled at a tender on Tuesday.retest of $1.3333, the August peak, according to Reuters data.
The dollar index meanwhile is approaching the 200-week simple moving average of 79.734 after breaking below that measure in September.
Focus now shifts to the 2 p.m. (1900 GMT) release of the U.S. Federal Reserve's minutes of its Federal Open Market Committee's last policy-setting meeting on Nov. 2-3.
"The main thing from the FOMC minutes will be how much support for QE2 was there at the meeting," said Geoffrey Yu, currency strategist at UBS in London.
Yu was referring to the Fed's latest $600 billion program of 'quantitative easing,' dubbed QE2, to try to stimulate a sluggish recovery by buying U.S. government debt. (Reporting by Nick Olivari; Additional reporting by Anirban Nag in London; Editing by James Dalgleish)