North Korean leader Kim Jong-il has reportedly told his military it may have to go to war, but only if the South attacks first.

The call for war readiness follows the sinking of a South Korean warship, the deadliest incident between the two countries in decades.

Following are some questions about how serious the crisis is, what may be behind the North Korean leader’s provocative moves and whether there is a risk of war.

WILL THERE BE WAR?

Most analysts doubt there will be war, as long as South Korea holds its fire.

North Korea’s obsolete conventional armed forces and military equipment mean quick and certain defeat if it wages full-scale war and Pyongyang is well aware of its limits.

South Korea has made it clear it will not retaliate despite investigations that found a torpedo fired by a North Korean submarine sank the Cheonan corvette in March, killing 46 sailors.

It knows the investment community will take fright if it does attack.

President Lee Myung-bak’s government said it plans to take the Cheonan case to the U.N. Security Council, rather than take the law into its own hands.

EVERYTHING IS SAFE AND SOUND?

No.

As the level of rhetoric rises, there is always a risk of skirmishes which could in turn develop into wider conflict.

President Lee raised the stakes by saying in a national address that the South would exercise its right to defend itself if the North provoked it again.

North Korea has said much the same.

Both have carefully avoided sounding like the aggressor, promising to fight only if the other strikes first.

But South Korea said it would resume loudspeaker broadcasts against the North at their armed border. Pyongyang says it will shoot at the equipment.

Another risk could be the build-up of U.S. military forces on the peninsula that will be seen by the North as a sign of imminent invasion, something that leaders in Pyongyang are said to be genuinely afraid of.

The United States, which has about 28,000 troops stationed on the peninsula, threw its full support behind South Korea but said it was working hard to stop the escalation getting out of hand.

WHAT IS KIM JONG-IL TRYING TO DO?

Analysts say North Korean leaders often resort to raising regional tensions to divert attention from troubles at home.

The torpedo attack was most likely a direct order by Kim Jong-il. South Korea’s military says it was probably carried out by the same unit it believes was responsible for the assassination of several cabinet ministers while visiting Myanmar and the bombing of a Korean passenger jet, both in the 1980s. Those incidents are thought to have been on the orders of Kim.

The South Korean government says a key reason for sinking the Cheonan was probably in retaliation for the North Korean navy’s humiliation in a skirmish last November. South Korea says the North was also looking for a distraction after a disastrous currency revaluation late last year reportedly led to rare protests against the hardline government.

North Korea had a rough start to the year in terms of economic difficulties after pledging on New Year’s Day to make it a top priority to improve the lives of its people.

The suspension of aid from the South since 2008 has deepened the North’s economic woes. U.N. sanctions imposed after last year’s nuclear test have also cut into the North’s key source of hard cash — the trade in arms.

There is concern in the South that Kim may be inclined to more lethal provocations because the routine sabre-rattling of recent years no longer seems to work to force concessions out of the South and regional powers.

WHAT ARE THE RISKS TO INVESTORS?

Market players have tended to think that confrontation between the two Koreas will not escalate into armed conflict because they believe Seoul will not risk the damage to its own economy and its powerful neighbours in North Asia, who together account for about a sixth of the world’s economic output.

In South Korea, even a nuclear test does little to rattle financial markets, as market players are more concerned with direct armed confrontation and have become largely inured to the North’s rhetoric.

But the latest report of Kim Jong-il calling for war readiness, after the Cheonan sinking, the deadliest incident between the two countries in decades, has unnerved financial markets.

The South Korean won slid to a 10-month low on Tuesday, forcing South Korean authorities to step in and support the currency.

Some analysts say historic trends suggest any market losses will remain brief, as long as the two Koreas stop short of all out war.

(Editing by Jonathan Thatcher and Michael Perry)