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UPDATE 2-S.Korea manufacturers expect better Q3-poll

(Recasts, adds context, details)

By Kim Myong-hwan

SEOUL, July 22 (Reuters) - South Korea's manufacturers expect business to improve in the third quarter but shaky U.S. markets and a weakened dollar are chipping away at confidence, a Commerce Ministry survey showed on Monday.

South Korea's economy is expected to grow more than six percent this year, double its advance in 2001, but forecasts assume a rebound in the U.S. economy before the end of the year.

Doubts about a U.S. rebound persist, however, as the dollar weakens and accounting scandals shake markets, including a fall in Dow Jones Index shares to an almost four-year low on Friday.

While South Korea has diversified export markets and domestic demand remains steady, economists see a risk of U.S. woes chilling sentiment here, something the ministry's poll hints at.

Its third-quarter business survey index (BSI) for manufacturers fell to 4.4 from 4.8 in the second quarter, the Commerce Ministry said.

Still above 4.0, it means companies expect business conditions to improve from the previous quarter, but the ministry said there was uncertainty.

FALLING CHIP PRICES

"Business conditions are still expected to improve in the third quarter," the ministry said in a statement. "But sentiment will be a bit down (from the second quarter), reflecting uncertainty in the U.S. economy."

"It reflects instability in U.S. financial markets, the fall in U.S. shares and the weaker dollar."

The BSI for electronics companies fell to 4.6 from 5.1 in the second quarter and that for semiconductor firms fell to 4.7 from 5.1.

Prices for memory semiconductors fell in the second quarter from the first, dashing hopes for a sustained rebound from record lows hit in 2001.

The BSI for automakers fell to 4.3 from 4.8 in the second quarter.

While South Korean automakers have enjoyed better sales in the United States on the back of larger, better-built products, like other exporters they are wary of a rise in the Korean won versus the dollar.

The won is up about 12 percent against the greenback since mid-April, making South Korean products more expensive in the United States.

Still, manufacturers expect to increase employment slightly in the third quarter and raise factory operation rates, the ministry said.

Investments in plants and equipment are expected to increase only modestly, the ministry said.

Part of South Korea's sustained confidence comes from surprising domestic demand, which has helped power economic growth since last year despite monthly falls in exports that lasted through the first quarter of 2002.

The ministry polled 4,313 manufacturing companies between June 12 and June 29.