The move Friday came three days after talks broke down between the government and HSBC Holdings PLC of the United Kingdom, which was bidding for a controlling stake in Seoulbank.

The Financial Supervisory Commission declared the bank a "weak financial institution," allowing the government to order capital reduction and inject public funds.

Two state financial firms, Korea Deposit Insurance Corp. and Korea Asset Management Corp, will inject the funds later this month, including 1.1 trillion won for purchase of the bank's bad loans.

As of the end of June, Seoulbank had 27 trillion won in total assets, compared with 27.3 trillion won in debts. The commission also said US investment bank Morgan Stanley Dean Witter & Co, Seoulbank's financial adviser, was seeking new management for the bank.

The commission and HSBCsigned a memorandum of understanding in February that called for the latter to buy a 70 per cent stake in Seoulbank for $700 million, with the Seoul government keeping the remaining 30 per cent. They missed an original deadline of May 30, but continued talks. The two sides differed over the amount of bad loans that the government would have covered after selling the majority interest in Seoulbank.

The government invested 800 billion won in Seoulbank and 700 billion won in Korea First Bank last year, effectively nationalizing them.

The sale of the two banks was one of the conditions laid down by the International Monetary Fund in exchange for its $58 billion bailout of the South Korean economy.

South Korean President Kim Dae Jung's government insisted on selling the banks to foreigners to demonstrate its willingness to open the cloistered domestic financial sector.

The Wall Street Journal