* Won falls to weakest since March 1998
* Worries about local dollar-funding shortages weigh
* Risk aversion seen barring quick turnaround
By Yoo Choonsik and Cheon Jong-woo
SEOUL, Feb 27 (Reuters) - The won tumbled to an 11-year low on Friday on investor concern about a shortage of U.S. dollars in South Korea and analysts said risk aversion fueled by the fragile state of the world's financial system would bar any quick turnaround.
Analysts conceded that some of the steps taken by the government of President Lee Myung-bak could help improve dollar funding in the long term but said that there was little the government could do to put an immediate halt to the freefall.
"(The won is) just friendless at the moment, it's unwanted. But I think most of the bad news is already in the price. I don't think investors are taking sufficient encouragement and notice of the better numbers, such as on external debt," said Patrick Bennett, a strategist at Societe Generale in Hong Kong.
"In an environment where risk appetite is low, you're not seeing the flow that would help lead a recovery in the won."
The won fell to as low as 1,542.9 per dollar, its weakest since March 1998, before ending local trade off lows at 1,532.8 on market talk of dollar-selling intervention by foreign exchange authorities near the close of the session at 0600 GMT.
South Korea said on Thursday it would exempt foreign investors from income and capital gains taxes on investment in local treasury bonds and monetary stabilisation bonds to lure more foreign capital into the country.
The won's drop came even after data showed early on Friday that South Korea's balance of payments surplus hit a near 2-year high in January as domestic investors sold off their foreign portfolio holdings and foreigners bought local shares.
The currency came under more pressure in recent months as evidence mounts that the heavily export-dependent economy will be hit especially hard by the financial and economic crisis.
South Korea's government expects the economy to shrink by about 2 percent this year but analysts forecast a contraction of as much as 7 percent, which would be the sharpest fall in the country's nearly 40 years of industrialisation. (Editing by Jonathan Hopfner & Jan Dahinten)