The change forces North Koreans to exchange 1,000-won notes for a new 10-won bill this week, sources in Seoul and media reports said.

The currency revaluation was announced at 11 a.m. Tuesday and the exchange for the new currency began at 2 p.m., Seoul's Yonhap News Agency said in a dispatch from the Chinese city of Shenyang, not far from the North Korean border.

The unexpected measure caused panic among North Koreans who were keeping money in their homes rather than in state-controlled banks, Yonhap said.

"Those who were worried about their hidden assets rushed to black markets to exchange them for Chinese yuan or U.S. dollars," the news agency said, adding that the measure has caused "great confusion."

A source told United Press International that commercial transactions were paralyzed in the North following the measure.

South Korea's biggest newspaper, Chosun Ilbo, said the North's authorities told residents that the currency reform was conducted to "remove economic imbalance after private farmers' markets mushroomed and the gap between rich and poor widened."

North Korea's state media have yet to confirm the currency revaluation.

If confirmed, the currency revaluation would be the first since 1992 and the fifth since the Democratic People's Republic of Korea was founded in 1947. The country issued new banknotes in 1949, 1959 and 1979. The 1959 reform was only redenomination with an exchange of a 100-to-1 rate.

North Korea watchers in Seoul say the currency revaluation is aimed at tackling soaring inflation and black-market trading. The communist nation has suffered tremendous inflation since it introduced market elements into its economy in July 2002.

The price of rice has increased to 3,000 North Korean won per kilogram. A North Korean's average monthly salary is 2,000 to 3,000 won. One U.S. dollar officially equals around 135 North Korean won but buys about 3,000 won on the black market due to inflation.

Under the 2002 reform package, called "July 1 measures for economic management improvement," North Korea allowed prices and exchange rates to float and permitted individuals and enterprises to run for-profit operations in the country.

It has also phased out a decades-old food rationing system and public distribution system, which forced people to get most of their food and basic necessities in markets.

The North has taken a series of follow-up measures since then concerning commercial transactions, agriculture and business, prompting people to rely more on the markets, which number 300 across the country, including 10 in Pyongyang.

As a result, privately run shops are increasing and people are looking for partnerships with Chinese and Russian businessmen to open shopping centers and department stores in major cities.

Some wealthy North Koreans rent and operate bars, karaoke rooms and computer cafes from state-run companies and a business mentality, which focuses on profitability, is spreading among the people, a report by the South Korean government said.

But the experimental capitalistic reforms have had some negative fallout, such as inflation. The reforms also weakened state controls over the population.

"The currency redenomination is aimed at tracing citizens who have amassed wealth," said Cho Bong-hyun, a North Korea analyst at the Industrial Bank of Korea in Seoul. With the measure, the North wants to flush out money hidden in the underground economy, he said.

Those who have stashed large amounts of money will be exposed by the measure.

"The measure could lead to punishment of ruling elites who are opposed to the North Korean leader Kim Jong Il's plan to transfer his power to one of his sons," a source said.

Kim, who inherited his father Kim Il Sung's power in the first dynastic succession in a communist state, purged a number of senior officials who opposed the father-to-son power transfer.

Kim, 67, is widely believed to have picked his 26-year-old third son, Jong Un, as his successor. Kim is expected to formally name the son as his successor in 2012 when the North marks the 100th birthday of its deceased founding leader, Kim Il Sung.

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