To prevent further weakening, he said, long-term market interest rates and bank lending rates should be lowered further -- as long as the foreign exchange market was not destabilised.

"Taking into account various indicators for July and August, the GDP growth in the third quarter will be worse than the second quarter," Kang Hyeong-moon, chief of the Bank of Korea's policy planning department, said in an interview.

South Korea's GDP contracted by 6.6 per cent through the year to the second quarter, compared with a 3.9 per cent annual drop in the previous quarter and 6.6 per cent growth a year earlier.

An International Monetary Fund report, quoted by South Korea's finance ministry on Wednesday, forecast the country's full-year GDP would fall seven per cent in 1998 and one per cent in1999.

South Korea has officially forecast the economy would post two per cent GDP growth in 1999 after a five per cent contraction in 1998 and a 5.5 per cent rise in 1997.

"Long-term bond yields and bank lending rates should fall further to prevent the economic slump (from worsening) to an extent that the foreign exchange market's stability is not damaged," said Kang.

The central bank said earlier this week that it would lower its open market operation rates below eight percent to push down market interest rates.

The announcement, and an immediate reduction by about a percentage point in the issuing rate on the central bank's overnight repurchase agreements, sent bond yields plummeting.

Benchmark three-year corporate bond yields fell to a yearly low of 11.19 percent on Friday morning from 12.40 percent at the beginning of this week.

The falling market yields are also forcing commercial banks to adjust downward their lending rates.

The Bank of Korea said on Friday major commercial banks plan toreduce by between 50 and 100 basis points their prime lending rates, currently ranging from 10.25 per cent to 11 per cent.

But he dismissed as "groundless" market talk that the central bank would further lower the overnight call rate to four per cent, compared with the current seven percent.