South Korea’s won dropped to a one- week low and government bonds fell as Europe’s credit crisis sapped demand for emerging-market assets.

The Kospi Index (KOSPI) of shares retreated for a third day as exchange data showed overseas funds sold more of the nation’s shares than they bought today. The euro approached the lowest level in more than a week as European Union leaders hold a two- day summit in Belgium starting on June 28. Billionaire investor George Soros said in an interview with Bloomberg Television yesterday that the summit could turn out to be a “fiasco” if the European leaders fail to resolve disagreement on the fiscal side within the next few days.

“With so many issues to be solved, there is both expectation and doubt about the European summit in the market,” said Lee Jung Hyun, a Seoul-based currency dealer with the Industrial Bank of Korea. “With the Kospi falling, a lot of overseas investors and local bank traders were betting for a stronger dollar today.”

The won weakened 0.4 percent to 1,161.63 per dollar at the close in Seoul, according to data compiled by Bloomberg. The currency touched 1,162.15 earlier, the weakest since June 15.

The won’s one-month implied volatility, a measure of exchange-rate swings used to price options, dropped 13 basis points, or 0.13 percentage point, to 8.36 percent.

South Korea’s industrial output expanded 0.5 percent in May from April, when it increased 0.9 percent, according to the median estimate of economists in a Bloomberg survey before government data due on June 29.

The yield on the 3.5 percent bonds due March 2017 rose one basis point to 3.42 percent, Korea Exchange Inc. prices show. Three-year debt futures climbed 0.03 to 104.77 and one-year interest-rate swaps were little changed at 3.34 percent.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net