SEOUL The U.S. Federal Aviation Administration (FAA) will downgrade South Korea's safety rating, blocking its two carriers from expanding business in the United States, Seoul's Transportation Ministry said on Friday.

The decision touched off a flurry of high-level meetings among Korean officials looking to contain damage from a move seen hurting tourism as the country gears up to co-host next year's 2002 FIFA world cup soccer finals with Japan.

Local media reported U.S. Embassy charge d'affaires Evans Revere delivered the news to South Korean Transportation Minister oh Jangseop on Thursday.

A ministry official confirmed the meeting took place though a U.S. Embassy spokesman declined to comment.

The downgrade, expected to be announced later in the day by the FAA, prompted an emergency meeting between Prime Minister Lee Han-dong and the Foreign and Transportation ministers set for 2 p.m. (0500 GMT).

---- Safety Concerns ----

The ministry did not say how long it would take to recover the higher rating, but said it aimed to do so as soon as possible.

Korean transportation authorities said last month a regular FAA inspection in May had found a lack of objectivity in South Korea's air crash investigations, unskilled technical staff as well as problems with flight operation rules and the screening of pilots.

Shares in Korean air fell by as much as seven percent in early trade as hopes Korea might avoid the downgrade were dashed by a slew of media reports hinting that it was pending.

Korean air shares were down 380 won at 6,980 at 0317 GMT while Asiana shares fell 10 won at 2,010.

The downgrade will prevent Korean air and rival Asiana Airlines from adding extra flights to the United States, bidding for new U.S. routes and code-sharing with U.S. airlines.

It will not affect the 6-7 flights a week South Korea's largest carrier operates on U.S. routes, including direct service to eight cities such as Los Angeles, New York and San Francisco.

Korean air had hoped to renew code-sharing with Delta Airlines that were suspended after local authorities blocked Korean air from new international routes in the wake of three crashes between 1997 and 1999. Seoul lifted that ban in May.

A Korean air Boeing 747 jumbo jet crash in Guam in 1997 that killed 228 passengers and crew was blamed on pilot error.

Korean air had two crashes that killed 13 people in 1999, one an MD-11 cargo plane that crashed into houses in Shanghai and the other a 747-200 cargo plane that crashed near Stansted Airport in England.

A Korean air official said the downgrade would also not affect scheduled deliveries of aircraft to the world's second largest cargo airline.

---- Aircraft Deliveries ----

Korean air has 19 aircraft due for delivery between now and the end of next year, including 14 from Boeing and five from Airbus

"We have not reviewed possible cancellations of deliveries," Korean air spokesman William Han told Reuters.

Korean air said on Thursday it would shed 500 jobs or three percent of its workforce through voluntary retirement scheme by the end of this year as part of its efforts to improve profitability.

Its net loss widened 74.9 percent to 345.9 billion won ($271.5 million) in the first half of the year due to a weaker won compared to the same period last year, bad weather and a pilot strike in June.

The second-largest carrier, Asiana Airlines, was also battered by foreign exchange losses, posting a net loss of 156.3 billion won in the first half.

Analysts forecast the airlines would be able to see some improvement in the second half of 2001 helped by a recovery of the Korean won and stable fuel prices. (U.S.$ = 1274.0 won)