The collapse of the South Korean won, which several analysts believe is impending, would send shudders throughout Asia and further complicate the regional economic contagion which began with the floating of the baht on July 2.

Jitters over the won yesterday sent the local currency tumbling beyond the Bt40 mark against the US dollar.

This forced Bank of Thailand Governor Chaiyawat Wibulswasdi to come out and try to talk up the baht. He called on exporters to sell the US dollar for the baht, saying that the baht should not sink further since its weakness was driven largely by nervousness over the won.

''The baht and other regional currencies are under pressure from the developments affecting the Korean won," he said. ''But there is no reason to panic and rush to buy dollars, causing the baht to drop unnecessarily.

''This is because the problem in South Korea is being monitored closely and measures are being mapped out to solve the problem."

Yesterday the won hit its daily permissible low for the third straight day. It fell to its daily limit low of 1035.5 when trading opened from around 1018 a day earlier. The baht was quoted onshore at lows of 40.20/40.50 per dollar at one point.

In July the won was traded at an average 889/US dollar, while the baht was hovering at Bt31.85/US dollar.

The tale of the two currencies is similar, although the scale of the problems in South Korea is much larger. South Korea is the world's 11th largest economy and its 12th largest exporter. Its problem stems from the massive indebtedness of the banking and corporate systems, built up over years of misallocation of financial resources and over-investment.

''At many companies debts are more than 400 per cent of capital. That was all right when the economy was growing fast, but now it has slowed and several conglomerates have collapsed under the strain," wrote Peter Montagnon of the Financial Times. ''This has wrought havoc in the banking system, where bad debts are estimated to be about 15 per cent of loans."

South Korean banks have been borrowing heavily to keep themselves and their customers afloat, and in the process pushing the country's total foreign debt to about US$125 billion this year. About US$78 billion of this is in short-term loans with a maturity of one year or less.

Since Korea's central bank has about US$30 billion in foreign exchange reserves, investors have been alarmed that this amount, which covers less than three months of imports, is not enough to repay the foreign debts in the wake of a crisis of confidence. Hence the attack on the won.

South Korea is showing the exact symptoms Thailand experienced, and which led it to finally seeking a bail-out from the International Monetary Fund (IMF) in August. At the root of Thailand's problem is the financial crisis and the mismanagement of the foreign exchange policy. With a financial system saddled with about Bt1.2 trillion in non-performing loans, 25 to 30 per cent of total loans, investors have been rushing to the exit.

The closure of 58 finance companies has dealt a big blow to confidence. How the remaining financial institutions are going to be saved remains unclear, not to mention the technical difficulties in getting rid of the bad debts or how to deal with the good assets in the 58 suspended firms.

The misallocation of financial resources and over-investment has pushed Thailand's indebtedness to US$90 billion, of which US$35 billion is in loans with a maturity of one year or less. Since the Bank of Thailand has run out of foreign exchange reserves due to its costly defence of the baht, it has sought a US$17.2 billion bail-out fund from the IMF.

Yet investors still believe that this IMF package is not enough to cushion the sovereign risk from the mountains of bad debts in the financial system and the short-term foreign debts.

A renegotiation of the IMF package is needed, yet the new Democrat-led government needs to prove its fortitude by following through with the austere economic programme before it might be allowed to renegotiate, if ever, the terms with the IMF.

It was only last year that South Korea joined the Organisation for Economic Cooperation and Development (OECD), a club of rich countries. Combining this prestige with its newly industrialised country status would certainly make it very tough for the country to swallow its pride and seek help from the IMF.

However, the country is now reportedly seeking to raise some US$10 billion to write off the bad debts in the financial system.

Several heads have rolled. Thailand has lost three finance ministers, a central bank governor, a prime minister and a government as a result of the economic meltdown and the tough medicine of the IMF package. President Kim Young-sam has fired his top economic aide and finance minister Kang Kyong-shik. The new Deputy Prime Minister and Minister of Finance and the Economy, Lim Chang-yuel, was yesterday busy putting together a comprehensive stabilisation package aimed at renewing confidence.

As part of the plan to make the won more flexible, the South Korean government, which still imposes rigid control over the financial markets, will allow, beginning today, a new 10 per cent won/dollar trading band. The won was previously prevented from going up or down by more than 2.25 per cent from its mid-rate against the dollar.

The baht is now freely floated, although in reality it has been sinking since the currency peg system was abandoned on July 2.

Whatever unfolds in the event of a collapse of the won, will have far-reaching implications for Thailand and the region.

A Hong Kong-based investment analyst said: ''Many people believe the won will collapse. It will cause the Taiwanese dollar and the Japanese yen to become weaker. Of particular concern is the oversupply of petrochemicals, steel, cars, semiconductors and the like in the region as a fall-out from South Korea's problem."