Heightened inter-Korean tension has dealt a fresh blow to the South Korean stock market already stung by concerns over a U.S. interest rate hike and China's currency move, but its impact is likely to be short-lived, analysts said Friday.
  

Straining frayed bilateral ties further, North Korea fired artillery shells over the western part of the heavily armed border on Thursday, prompting the South to fire back dozens of rounds.
  

North Korean leader Kim Jong-un ratcheted up his offensive by ordering his military to beef up combat readiness and threatened to destroy a loudspeaker on the border if Seoul does not stop "psychological warfare" with it by Saturday afternoon.
  

The artillery exchange spooked investors still reeling from uncertainties surrounding the world's No. 1 and second-largest economies, sending local stocks tumbling.
  

The main benchmark KOSPI sank 2.01 percent to 1,876.03 to hit a two-year low as foreigners and retail investors dumped shares. The secondary KOSDAQ index tumbled 4.5 percent to 627.05, the lowest level since early March. 
  

Market watchers said North Korea's latest provocation could negatively affect the local bourse over the short haul.
  

"The North Korea risk further exacerbated investor sentiment, which could drag down the stock market and weaken the won's value," Byun Joon-ho, a researcher at HMC Investment & Securities, said. "But it is likely to end up as a short-lived negative lead."
  

Others echoed the view, predicting the fallout of the North Korea shelling will likely have a short-term impact on the local bourse if history is any guide.
  

"Risks related to North Korea negatively affect the financial market, although its impact has mostly been limited in the past," Kim Dae-jun, an analyst at Korea Investment & Securities, said "The latest military conflict may follow a similar pattern."
  

North Korea's past nuclear tests and the December 2011 death of former leader Kim Jong-il roiled the local financial market but local stocks rebounded soon after as investors shrugged off a possible full-fledged war and its effect on the fundamentals of the South Korean economy.
  

The local stock market also has remained relatively calm over the past years whenever Pyongyang fired missiles during joint drills by Seoul and Washington and when skirmishes took place near the border without human casualties.
  

While political and military tension on the Korean Peninsula has been cited a key reason for undervalued local stocks over the past decades, dubbed the "Korea Discount," investors and credit ratings agencies have increasingly played down its impact on the financial market.   
  

"The North Korea risk may negatively affect shares in the initial stage of the provocation," Kim said. "The extent of the loss could vary, depending on the seriousness of the risk, but the North's artillery firing is unlikely to match that of Kim Jong-il's death or the first nuclear test (in 2006)." 
  

Dismissing the so-called North Korea risk, some analysts said the main focus of the market at the moment is on the timing of the U.S. Federal Reserve's rate increase and the slowing growth of China, South Korea's top trading partner.
  

The U.S. central bank is widely expected to increase its short-term interest rate as early as in September, which would be the first rate hike in almost a decade, prompting foreign investors to flee the local financial markets.
  

Foreign investors' exit has led to a sharp drop in local stock prices over the past sessions and sent the local currency tumbling against the U.S. dollar.
  

A recent series of China's currency devaluations, apparently aimed at spurring slowing exports, have also jolted the local stock and currency markets, sparking concerns over the health of the world's second-largest economy.
  

In July, China's exports dipped 8.3 percent from the same month last year, while imports also dived 8.1 percent on-year.   
  

Overnight, U.S. equities dropped 2 percent after the Federal Reserve highlighted global growth concerns, which sparked a sell-off across the board. China's benchmark Shanghai composite index also slipped more than 3 percent on Thursday, extending losses from the recent slump.
  

"While North Korea has a short-term effect that is not related to the fundamentals of South Korea's economy, issues in the U.S. and China could have a lasting impact on the financial market," Byun said. (Yonhap)