* Stock index and bond futures fall; won NDFs slide
* Selloff seen extending into Wednesday
* Tensions with North Korea were already rising (Updates with details)
By Yoo Choonsik
SEOUL, Nov 23 (Reuters) - South Korean stock futures and the won tumbled on Tuesday and are set to fall further on Wednesday after North Korea fired dozens of artillery shells at a South Korea island in the heaviest bombardment by the reclusive state in decades.
South Korea and the United States condemned Pyongyang after the clash, which Seoul said killed two soldiers and wounded 17 other soldiers and three civilians.
The bombardments on the island, just about 10 km (6 miles) from the maritime border with the North, lasted for more than an hour and the news broke at the end of trading for Seoul's spot markets.
"The news came at a time when market sentiment was already weakened by European debt and Chinese tightening concerns. And combined, the stock market will do poorly tomorrow," said Chung Seung-jae, market analyst at Mirae Asset Securities.
"Artillery firing on a residential area was unlike its other acts of aggression. And this is alarming."
December KOSPI 200 index futures
The benchmark KOSPI lost just 0.8 percent,
suggesting the index will suffer a knock-on drop early
Wednesday. Korean government bond futures
The dollar soared more than 4 percent against the won in offshore trade before trimming gains. Dollar/won one-month offshore forwards jumped as high as 1,180 before pulling back to near 1,160, up about 2.5 percent.
The dollar had gained about 1 percent in local spot trade to 1,137.5 .
South Korea benchmark sovereign CDS spreads widened about 15 basis points to 102 basis points after the news. They had been near 74 basis points earlier this month, the tightest levels since the 2007-2008 global financial crisis.
The Korean news comes at a time when investors are already nervous about Ireland's debt crisis and whether it will spread to other peripheral countries in the euro zone. One concern for policymakers in Seoul will be the potential for capital flight by foreign investors, who have flooded fast-growing emerging markets with cash in the absence of strong returns in developed economies. The central bank said it would cooperate with the government to stabilise markets if necessary following the exchange of artillery fire. [ID:nSEV000234]
South Korea has been one of the biggest recipients of foreign inflows in Asia outside of Japan this year, with the stock market taking in $15.5 billion of funds -- nearly 30 percent of all coming into the region -- and the bond market also a big favourite.
Military clashes in the past had a limited impact on financial markets in South Korea. But investors have become more sensitive to flare-ups on the Korean peninsula in the past few years.
Residents from the island were fleeing on fishing boats, Seoul media reported, and witnesses said several houses were still burning hours after the attacks.
President Lee Myung-bak convened an emergency meeting of security ministers, while other financial authorities including the central bank held meetings of senior officials.
Financial authorities will hold another meeting before markets open on Wednesday to check the markets situation overnight and to discuss possible measures.
There was no indication if the government would impose any measures in financial markets, such as shortening trading hours or banning specific types of trading.
South and North Korea have been technically at war for more than half a century because their 1950-53 conflict ended in a truce.
($1=1126.0 Won) (Additional reporting by Jungyoun Park in SEOUL and Umesh Desai in HONG KONG; Editing by Neil Fullick)