It declined 5.6 per cent quarter-on-quarter in October to December, the steepest fall since the Asian financial crisis in 1998.

The finance ministry has said it will submit the supplementary budget - equivalent to 10 per cent of the budget already set for this year - to parliament by the end of this month.

South Korea's president has called for urgent measures to avoid recession [Reuters]
Yoon Jeung-Hyun , the finance minister, has previously warned the economy could contract by around two per cent this year and forecast that more than 200,000 jobs would be lost.

The ruling Grand National Party (GNP) said in a statement on Monday that the extra spending is equivalent to about two per cent of the country's gross domestic product.

The party says it is expected to boost growth by 1.5 percentage points, or two per cent if supported by increased private investment and deregulation.

The additional spending is more than twice the amount the government pumped into the economy during the Asian financial crisis of 1998, the last time the South Korean economy entered recession.

The announcement helped lift South Korean shares with the Kospi up by around 1 per cent in afternoon trade on Tuesday.

'Provisional' trade deal

In a separate development, South Korea and the European Union have reached a "provisional'' free trade agreement, but unresolved issues may affect the reaching of a final agreement.

Lee Hye-min, South Korea's chief negotiator told reporters on Tuesday that the two sides had reached an agreement in almost all areas, but that a final deal must be approved by their respective trade ministers.

"Until everything is agreed, nothing is agreed," Lee said.

Ignacio Garcia Bercero, his EU counterpart, also warned that "success is not guaranteed".

South Korea and the 27-member EU bloc have been working to reach a deal to reduce tariffs and other barriers to commerce for nearly two years.

Disagreements over automobiles and other issues had prevented a deal.

South Korea and the EU are major trade partners with bilateral exchanges totalling $98.4bn in 2008.