The agreement was reached during a summit between Japanese Prime Minister Yoshihiko Noda and South Korean President Lee Myung-bak, who also urged his counterpart to make greater efforts to resolve issues dating back to its colonial rule of the Korean peninsula. 

News of the currency swap deal surprised some traders who had been bearish on the won and drove the currency to a one-month high against the dollar as the agreement gives South Korea more firepower to defend its highly vulnerable currency.

The two countries agreed to open a new dollar-local currency swap arrangement worth the equivalent of $30 billion and to expand an existing bilateral yen-won arrangement to $30 billion from $3 billion. 

The agreement will increase their total swap arrangements to $70 billion from $13 billion, including a $10 billion swap arrangement under a $120 billion emergency financing plan set up among 13 East Asian countries. 

"We agreed to implement the South Korea-Japan currency swap line of $70 billion, sharing the view that it's important to enhance financial and currency cooperation to preemptively stabilize the financial markets amid escalating global economic uncertainties," Lee told a joint news conference in Seoul. 

South Korean finance ministry officials said Seoul had proposed the expansion of the swap lines on the advice of an official at Standard & Poor's Ratings Services during a recent regular policy review meeting.  

Noda praised the agreement on swaps as confirmation of the ability to coordinate policy between the region's second- and fourth-largest economies.  

The won rose as much as 1.5 percent on the day to a session high of 1,128.4 per dollar, its strongest intraday level since Sept. 19. 

Like many other emerging market assets, it has been on a wild ride since August as a global market rout prompted investors to dump riskier assets, raising fears in Seoul of a possible repeat of the massive capital flight seen in 2008/09 during the global financial crisis. 

The won tumbled more than 9 percent against the dollar last month, though figures later showed actual fund outflows were small. 

South Korea already holds more than $300 billion of foreign reserves and has a separate yuan-won currency swap deal with China worth the equivalent of $26 billion, though the deal with Beijing will have to be extended soon or it could expire.  

"The two leaders agreed the global economic uncertainty was deepening due to issues such as Europe's fiscal crisis and that it was important for both countries to strengthen cooperation in financial and monetary policy to ensure financial market stability," South Korea's central bank said in a statement. 

The leaders "agreed to expand currency swaps to an amount sufficient to be mutually beneficial by playing a pre-emptive effect in stabilizing financial markets," it said. 

South Korea's short-term overseas borrowing — the heaviest in the region when compared with official reserves — and its over-leveraged household sector have frequently left the won vulnerable to global market turmoil. 

Lee said the leaders had also discussed breathing life into efforts to draw up a free trade agreement between the two countries, amid concerns in Tokyo that Seoul's pending trade deal with the United States will give Seoul a competitive advantage.     

"We shared a view to strengthen working-level cooperation to resume the talks on the FTA between the two countries as soon as possible," Lee told a news conference in Seoul. 

Free trade talks between the neighbors broke down in 2004, but the two sides have maintained unofficial contacts to try to get negotiations back on track.