By Jon Herskovitz and Yoo Choonsik
SEOUL (Reuters) - South Korea's entire cabinet offered toresign on Tuesday in the face of massive street protests as itsincreasingly unpopular president warned that Asia'sfourth-largest economy could be heading into crisis.
The protests against the government, in office barely threemonths, were sparked by public outcry over a deal to widen itsmarket to U.S. beef imports and have cast a darkening cloudover President Lee Myung-bak's plans for sweeping reform.
"The prime minister offered the cabinet's resignation atthe regular meeting this morning (with Lee)," a spokeswoman atthe prime minister's office said, in what local media said wasa response to the mounting anti-government protests.
Tens of thousands of protesters chanting "Lee Myung-bak goaway" clogged the streets of central Seoul in a candlelightrally attended by mothers toting children, radical laborgroups, office workers and college students.
Police sealed off roads in the capital, stackingsand-filled shipping containers to block the main streetleading to the presidential Blue House and deployedhigh-pressure water cannons to disperse any violent protesters.
Organizers said 700,000 gathered in Seoul for the largestanti-Lee rally to date. Police put the number at 80,000 whilesome local media estimated the crowd at 200,000 to 400,000.
"I want to denounce not only the beef deal but the otherpolicies of the Lee Myung-bak government. I'm just one personbut I think the president will listen to me when I speak loudlywith so many others," said protester Sang Mi-ra.
ECONOMIC ROUGH PATCH
Lee warned that surging resource prices and slowing growthwere pushing the economy toward its roughest patch in a decade.
"Our economy is faced with a serious difficulty, withprices rising and the economy gradually slowing," Lee said in aspeech to mark the 21st anniversary of pro-democracy proteststhat helped end years of autocratic rule in South Korea.
Shortly after he spoke, the government announced thatproducer price inflation in the world's fifth-largest crude oilimporter had hit a near 10-year high last month.
The data makes it even more likely the central bank willkeep interest rates on hold at its monthly meeting on Thursdaydespite recent pressure from the government to relax monetarypolicy to spur slowing domestic demand.
Inflation fears have hit local financial markets and onTuesday forced the authorities to sell dollars to prop up theweakening won. Bonds prices also fell and the political unrestwas cited as a factor is pressing down share prices.
Lee's promise of 6 percent growth this year now looks outof reach and many economists doubt it will even match lastyear's 5 percent rise because of the impact of slowing economicgrowth and surging inflation around the world.
RESHUFFLE
Local media said Lee would start a government reshufflelater this week and speculated the conservative former CEOwould ditch his farm, health and education ministers, alongwith several aides, and possibly the foreign and financeministers.
The April beef deal with the United States was meant tohelp a separate bilateral free trade accord that U.S.congressional leaders threatened to block unless South Koreaopened up its market to beef imports.
But widespread concern over mad-cow disease in U.S. beefquickly turned the issue into a lightning rod for a broad rangeof grievances against Lee's government that the publicincreasingly sees as out of touch with its concerns.
The U.S. government is vexed by the delay in reopening alucrative market and said it will not renegotiate the deal.
"We are in close contact with the Korean government in aneffort to find a mutually acceptable path forward," saidGretchen Hamel, spokeswoman for U.S. Trade Representative SusanSchwab.
Lee won December's presidential election over an unpopularliberal opponent by a landslide, largely on his pledge to bringhigh growth back to South Korea's export-dependent economy.
"His path to the presidency was too easy. He felt he coulddo no wrong and this created arrogance and confidence that madeit difficult for him to see the political landscape," said KangWon-taek, political science professor at Soongsil University.
Truck drivers, following the lead of unions in countriesacross Asia and Europe, voted on Monday to go on strike overrising fuel prices. They ignored the government's $10.2 billionfinancial aid package announced a day before and designed inpart to cushion the impact of mounting energy costs.
Other unions also voted on whether to strike and slow downproduction at auto plants and other factories.
The growing political storm has all but blocked thegovernment's plans for major economic reform, including taxcuts, privatization of major state-run firms and banks andefforts to make the country more accessible to foreigninvestment.
The new conservative-dominated parliament has been unableto sit because the opposition has boycotted its opening.
"The current crisis signifies a deeper public malaise inKorea, risking to dampen economic growth over the coming year,"said Hong Kong-based HSBC Asia economist Frederic Neumann.
"The second big worry is that consumer and businesssentiment takes another hit, thus depressing domestic demand ata time when exports could show signs of buckling."
(Additional reporting by Rhee So-eui and Park Ju-min inSeoul, and Doug Palmer and Missy Ryan in Washigton, Writing byJonathan Thatcher)
