SEOUL - South Korean President Lee Myung-bak vowed retaliation against any further provocation by the North after it attacked an island last week as anger simmered over the government's response.
Lee addressed the nation for the first time since Tuesday's attack as U.S. and South Korean warships took part in military manoeuvres, prompting concern in regional power China and threats of all-out war from North Korea.
He also visited U.S. forces in Korea to thank them for the show of force.
"North Korea will pay the price in the event of further provocations," Lee said. "Attacking civilians militarily is an inhumane crime that is strictly forbidden in a time of war... Now is the time to show action, not a hundred words."
Lee has been criticised in the media for being weak, and an opinion poll on Monday showed many felt the government had been too restrained. Lee's personal rating has also fallen since the attack, and there have been protests against his response.
About 500 former soldiers and ex-police burnt North Korean flags and effigies of North Korean leader Kim Jong-il at a Seoul rally on Monday.
The attack raised tensions on the peninsula to their highest level in at least two decades, but experts say the crisis is unlikely to escalate into war.
Clashes in disputed waters off the west coast are not uncommon, with dozens of sailors killed and warships sunk over the past 11 years, but Tuesday's attack on Yeonpyeong was the first time a residential area had suffered a direct hit. Of the four killed, two were civilians.
Moody's Investors Service said uncertainty over confrontations have already been factored into South Korean credit ratings. But the agency said it was still determining whether the recent attack marked a fundamentally more reckless stance by North Korea.
Markets in Seoul mirrored the broader region on Monday, as players judged the latest spat as being no worse than previous between the Koreas, who are still technically at war having only signed a truce to stop fighting in the 1950-53 war.
China has proposed emergency talks amid global pressure on Beijing to be more aggressive in helping resolve the standoff between the rival Koreas and try to rein in ally Pyongyang which depends on China for aid.
Washington and Tokyo were non-committal, saying they would consult with Seoul, which was sceptical of the proposal to sit down with North Korea, effectively rewarding it for bad behaviour.
The reclusive North was previously offered massive aid in return for disarmament pledges that went unmet.
A senior North Korean official also expressed scepticism about the Chinese call, Japan's Kyodo news agency said. North Korea has yet to issue an official response but the official, speaking on condition of anonymity, said countries responsible for the latest standoff should first hold talks.
Beijing is wary of the collapse of North Korea, which could send millions of refugees across its border and strengthen the U.S.-South Korea alliance in a possibly combined Korea.
The whistle-blowing Wikileaks website, revealing a cache of U.S. diplomatic cables, said there had been talks between U.S. and South Korean officials about the prospects of a unified Korea, according to the New York Times.
South Korea considered commercial inducements to China to "help salve" Chinese concerns about living with a reunified Korea, according to the American ambassador to Seoul, the newspaper said.
U.S. and South Korean forces staged a second day of manoeuvres off Taean province, 100 km (60 miles) south of Yeongpyeong and out of range of North Korean artillery.
Landing exercises at Mallipo Beach in Taean were cancelled due to bad weather, but blue-water drills went ahead.
The third in a series of joint large scale drills since the sinking of the South's Cheonan warship in March, the U.S. military said the exercise was defensive in nature and demonstrated U.S. commitment to regional security.
Tokyo said it too would stage a joint drill with the United States off Japan from Friday.
In the South Korean capital Seoul, life and business went on as normal. Authorities lifted a ban on South Korean travel to the joint Kaesung industrial complex in North Korea for the day.
"It feels a little more strained than previous occasions, but we've been here before," said Tom Brown, 42, a Briton working for the Tesco supermarket chain in Seoul. "It's just sabre-rattling... there's not much point in worrying too much."
(Additional reporting by Kim Miyoung, Yoo Choonsik, Jack Kim and Jeremy Laurence in Seoul; Chris Buckley in Beijing; and Yoko Kubota in Tokyo; Writing by Nick Macfie; Editing by Andrew Marshall)
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