By Sungwoo Park and Bomi Lim

Nov. 28 (Bloomberg)

-- Residents of South Korea’s Yeonpyeong island were ordered to bomb shelters after artillery shots were heard on the North Korean mainland and U.S. warships began naval exercises in the nearby waters of the Yellow Sea.

The echo of shots rang out this morning, said a South Korean Defense Ministry official who declined to be named, citing military policy. While residents were later allowed out of shelters, the aircraft carrier USS George Washington joined South Korean vessels for four days of drills.

U.S. Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, said the U.S. is trying to prevent the tensions over North Korea’s Nov. 23 attack on the South Korean island on the disputed maritime border from escalating into a more significant confrontation.

“We’re very focused on restraint and not letting this thing get out of control,” Mullen told CNN in an interview scheduled for broadcast on “Fareed Zakaria GPS” today and posted on the network’s Website. “Nobody wants this thing to turn into a conflict.”

Chinese State Councilor Dai Bingguo arrived in Seoul yesterday and met with South Korean Foreign Minister Kim Sung Hwan, the government in Seoul said. He is meeting with President Lee Myung Bak today, Yonhap News reported, while China’s Xinhua News Agency said Choe Tae Bok, chairman of North Korea’s Supreme People’s Assembly, will visit China Nov. 30 to Dec. 4.

‘Very Regrettable’

The shelling of Yeonpyeong, which killed four people and wounded 20 more, raised tensions that flared after an international inquiry concluded that North Korea torpedoed the South Korean warship Cheonan in March and following North Korea’s claims of advances in its nuclear program.

North Korea said that, if true, reports of civilian casualties are “very regrettable.”

“But the enemy should be held responsible for the incident as it took such inhuman action as creating ‘a human shield’ by deploying civilians around artillery positions and inside military facilities,” state-run Korean Central News Agency said yesterday.

The U.S. called the naval drills, which include four smaller warships as well as the George Washington, “defensive in nature” and said they were initially planned before the Nov. 23 shelling of Yeonpyeong.

The nuclear-powered carrier, which holds about 85 aircraft and is served by a crew of 6,500, was last in waters off the Korean Peninsula in July as part of drills after the Cheonan’s sinking, which killed 46 sailors.

‘Counter-Attack’

Kim Jong Il’s regime warned again today that any infringement of North Korea’s sovereignty would be met with force.

North Korea “will deal a merciless military counter-attack at any provocative act of intruding into its territorial waters,” it said in a commentary published by the Rodong newspaper and reproduced by KCNA.

The Korean won was Asia’s worst-performing currency against the dollar Nov. 26 as the conflict continued. The Kospi stock index fell 1.3 percent. The tension also contributed to gains for the dollar, which rose the most since August against six major counterparts.

Shipping was warned to avoid an area of the Yellow Sea parallel to China’s northeastern city of Qingdao while gunnery exercises take place from Nov. 29 to Dec. 3, according to the National Geospatial-Intelligence Agency. Qingdao lies about 615 kilometers west of Seoul.

China’s Involvement

China’s Foreign Ministry warned against having the exercises in China’s “exclusive economic zone” without its authorization, Xinhua reported.

The Pentagon reiterated that the U.S. military notified China of the planned exercise, as it has in the past.

President Barack Obama, along with Japan’s Prime Minister Naoto Kan and South Korean President Lee Myung Bak, have called on China to use its influence to temper North Korea’s actions. China is North Korea’s main economic and political benefactor.

China has the most leverage with North Korea and “it’s really important that Beijing lead here,” Mullen said.

North Korea’s actions destabilize the region, “and China has as much to lose as anybody in that region with the continuation of this kind of behavior,” he said.

The shelling of the island, which has a military base and a civilian fishing community, was the first attack of its kind since the 1950-1953 Korean War, which ended with an armistice rather than a treaty.

Main Enemy

South Korea is considering reinstating North Korea as the “main enemy” in its defense guidelines, Yonhap News reported yesterday, citing a government official it didn’t identify. The term may be restored in a Defense White Paper following North Korea’s artillery attack, the Korean-language news agency said.

Lee on Nov. 26 appointed former Joint Chiefs of Staff Chairman Kim Kwan Jin, 61, to replace Defense Minister Kim Tae Young, who quit amid criticism that the military’s response to the shelling was inadequate.

Russia’s Foreign Minister Sergei Lavrov and his Chinese counterpart Yang Jiechi urged prevention of further escalation on the peninsula and vowed to “work toward easing the tension between the two Korean parties, as well as resuming the six- party talks” on North Korea’s nuclear program, during a telephone call yesterday, according to an e-mailed statement from the Russian ministry.

The western sea border, demarcated by the UN after the war and never accepted by North Korea, was the scene of deadly naval skirmishes in 1999 and 2002.

North Korea contends the border should have been drawn further south in order to include Yeonpyeong and four neighboring islands as part of its territory.

--With assistance from Justin Blum in Washington, Michael Forsythe in Beijing, Saeromi Shin in Seoul and Maria Kolesnikova in Moscow. Editors: Brett Miller, Paul Tighe

To contact the reporters on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Bomi Lim in Seoul at blim30@bloomberg.net

To contact the editors responsible for this story: Bill Austin at billaustin@bloomberg.net; Paul Tighe at ptighe@bloomberg.net