Kang Man-soo, the country's finance minister, said: "The government has decided to join in global coordinated efforts to stabilise financial markets and we'll continue to provide preemptive, decisive and sufficient measures to this end.
"We believe providing the government guarantee on banks' foreign exchange dealings is the strongest step to save our foreign exchange reserves and our reserves will be managed more stably in the future with these measures and an expected surplus in current account."
South Korea's currency has dropped to a 10-year low, foreign exchange reserves fell for six consecutive months and its stock markets hit a three-year low.
Analysts have questioned the country's banks ability to raise dollars to pay for maturing foreign loans as the credit crunch has hit.
James Rooney, of the Seoul Financial Forum, told Al Jazeera said that South Korea's domestic economy was not in trouble directly at present, but that had a lack of liquidity in their foreign exchange markets, even if Seoul has significant foreign currency reserves.
"The challenge that government is addressing directly here is the roll over of short-term debts that financial institutions hold with overseas counterparts, which for lots of reasons, independent of Korea, has natually become very difficult in today's economy."
Therefore, Rooney said the government guarantee will help those in negotiations for short-term loans and ease pressure built up due to a weakening Korean wong.