(Recasts with markets, more analysts, background)
By Cheon Jong-woo
SEOUL, Jan 5 (Reuters) - South Korea's foreign exchange reserves rose in December, halting an eight month slide that had hammered the currency and cast doubt on the country's financial stability.
The won rallied, but analysts said the respite may be brief.
"The rise is good, but it is premature to say that the reserves will improve more, as we have not solved fundamental financial-sector problems," said Kim Jae-eun, an economist at Hana Daetoo Securities.
South Korea's authorities have pumped foreign currency liquidity into local money markets to help domestic companies weather the global credit crisis, sending the country's foreign exchange reserves to a four-year low in November.
Worries over the nation's foreign exchange reserves, the sixth largest in the world, had fanned investor concerns over a fresh currency crisis similar to the one that battered South Korea over a decade ago.
But the country was able to keep reserves above $200 billion as it used dollars from a $30 billion currency swap line with the U.S. Federal Reserve to pump liquidity into its markets.
In December, the central bank injected a total of $10.4 billion into the money market using the U.S. Fed credit line. The government also supplied $5.7 billion last month.
South Korea's foreign exchange reserves rose to $201.2 billion at the end of December as investment gains and rises in non-dollar assets more than offset dollar-selling intervention, central bank data showed on Monday. Reserves were at $200.5 at the end of November.
The data, along with firmer local stocks, lifted the won by as much as 2 percent against the dollar. The won lost 25 percent in 2008 although it staged a steep rally in December.
DOUBTS REMAIN
But analysts warned the recovery in foreign reserves may be short lived given persistent worries about a slowdown in Asia's fourth-largest economy.
"If the global economy remains sluggish, it would remain difficult to roll over foreign currency debt. That will hurt FX reserves," said Park Sang-hyun, the chief economist at HI Investment & Securities.
The ratio of the current external debt to foreign exchange reserves hit 94.8 percent at the end-September from 85.6 percent at end-June.
The uncertainty over the foreign reserves could hamper the won's rise in the longer-term, Hana Daetoo Securities' Kim said
A central bank official said local authorities had carried out moderate dollar-selling to help stem the won's decline last month, but declined to provide the value.
"The authorities stepped in to carry out smoothing operations," the official said by telephone, declining to be named.
The authorities sold dollars in December to help local companies reduce losses linked to foreign exchange derivatives and foreign currency debts when they closed their books for last year, traders said.
South Korea's foreign reserves, which ranked sixth in the world at the end of November, shrank by $61.0 billion in all of 2008, marking the first annual drop since 1997 when they fell by $12.8 billion, the Bank of Korea's data showed.
The central bank said 89.6 percent of the reserves were invested in securities, followed by 10.0 percent deposited at financial institutions. (Editing by Jonathan Hopfner and Kazunori Takada)