World stocks began the week with a jolt Monday as the death of North Korea's absolute ruler, Kim Jong Il, added to the uncertainties clouding the outlook for financial markets.
South Korea's Kospi index dived nearly 5 percent but later recouped some losses to close 3.4 percent lower at 1,776.93. The Korean won also fell, losing 1.6 percent against the U.S. dollar, a traditional haven in times of uncertainty. The Japanese yen, euro and other regional currencies also weakened against the dollar.
Japan's Nikkei 225 index dropped 1.3 percent to 8,296.12. Hong Kong's Hang Seng slid 1.2 percent to 18,070.21 and the Shanghai Composite Index rebounded from earlier losses to finish down 0.3 percent at 2,218.24.
Kim Jong Il's death, announced Monday by North Korean state television, raises the spectre of more instability on the divided Korean peninsula as the reclusive regime undergoes a leadership succession.
Those worries are most acute in South Korea and Japan, which have often been the targets of North Korea's mercurial military and diplomatic actions.
"We're seeing deeper negative sentiment in some markets," said Dariusz Kowalczyk, strategist at Credit Agricole CIB, in Hong Kong. "Basically this is because risk aversion on the geopolitical front has increased given that there's a transition of power in a relatively unstable country. So we're seeing an impact on equities, currencies."
In Europe, Britain's FTSE 100 lost 0.5 percent to 5,363.11 and Germany's DAX slipped 0.3 percent to 5,687.62. France's CAC-40 fell 0.3 percent to 2,961.74. Wall Street was set to open lower with Dow futures off 0.1 percent at 11,770. Broader S&P 500 futures shed 0.1 percent to 1,210.20.
South Korea's military and police went on alert and President Lee Myung-bak, convened a national security council meeting. Japanese leaders said they were watching markets closely and in contact with the U.S., Kyodo News Agency reported.
"We need to prepare for any contingencies," Kyodo quoted Jun Azumi, the Japanese finance minister, as saying.
Kim was ailing after suffering what is thought to have been a stroke in 2008 and died at age 69 on Saturday.
North Korea's official Korean Central News Agency on Monday identified his third son, the twenty-something Kim Jong Un, as the "great successor" to the man known officially as the "Dear Leader."
But even with the younger Kim designated as his father's successor, and already filling high-ranking posts, some experts fear a behind-the-scenes power struggle or nuclear instability.
Fitch Ratings, which spooked markets across the globe with a warning Friday it may downgrade ratings of a half-dozen European countries, said it did not view Kim's death "as a trigger for negative action on South Korea's sovereign ratings in itself."
"For now, it's much too early to say risks have materially increased, but clearly we will keep the situation under close review," said Andrew Colquhoun, head of Fitch's Asia-Pacific sovereigns.
Markets in Taiwan, Singapore, Australia, New Zealand and Indonesia also sank on Monday.
"Particularly with the bearish market sentiment now, any negative news will make the market much more gloomy," said Kwong Man Bun, chief operating officer at KGI Securities in Hong Kong. The Hong Kong benchmark dipped 100 points after North Korea's announcement which "reflects concern over potential political instability," he said.
Still, barring unexpected developments in Pyongyang the impact of Kim's death on markets is likely to be passing, analysts said.
"In the short term there will be some psychological uncertainty but I think things will go back to the fundamentals," said Steven Leung, director of institutional sales at UOB-Kay Hian Ltd. in Hong Kong.
Kim's death overshadowed what already was a gloomy start to the week after Fitch warned it may downgrade the credit ratings of heavyweights Italy and Spain, as well as Belgium, Cyprus, Ireland and Slovenia.
Coming just a week after EU leaders struck a deal they thought would contain the continent's debt crisis, that and other negative news dashed hopes of an end to the turmoil endangering the euro -- the currency used by 17 European nations -- and threatening the entire global economy.
"Everyone is waiting to see what comes from the next conference of European nations. Hopefully something good," said Jackson Wong of Tanrich Securities, in Hong Kong.
Benchmark oil for January delivery was down 21 cents at $93.32 a barrel in electronic trading on the New York Mercantile Exchange.
Business Writer Kelvin Chan in Hong Kong contributed.