Tokyo:  Asian stocks fell, dragging the MSCI Asia Pacific Index to its lowest level in 10 months, after a report said North Korea's military had been ordered to prepare for combat.

Another influence was fears that Europe's debt crisis may spread.

Samsung Electronics, Asia's biggest maker of electronic chips, televisions and mobile phones, declined 2.2 per cent in Seoul and the Commonwealth Bank of Australia fell 3.7 per cent.

These lead declines among financial companies as the International Monetary Fund called on Spain to make more progress in attempts to overhaul its ailing banks, and Asian bond risk rose.

Mining company BHP Billiton dropped four per cent after copper and oil retreated.

The MSCI Asia Pacific Index declined 3.2 per cent to 108.70 yesterday in Tokyo, the lowest level since July 24. The gauge has tumbled 16 per cent from its high this year on April 15 amid concern widening budget deficits in some European countries and China's steps to curb asset bubbles will derail growth.

Standard and Poor's 500 Index futures fell 2.6 per cent.

"This confrontation in Korea is unlikely to result in a full-scale conflict, but there is a feeling of discomfort among investors," said MU Investments senior strategist Hiroshi Morikawa. MU Investments manages $14 billion in Tokyo.

"I've been most afraid that the Greece-originated financial problems would spill over to Spain. That seems to be looming now," he said.

North Korean leader Kim Jong Il ordered the military to get ready for combat in a broadcast last week, a defector group reported.

Concern deepened that Europe's finances may worsen after four Spanish savings banks submitted a proposal to the nation's central bank to merge their businesses.

Hong Kong's Hang Seng Index sank 3.5 per cent and China's Shanghai Composite Index declined 1.9 per cent. The Nikkei 225 Stock Average lost 3.1 per cent in Tokyo. Australia's S&P/ASX 200 Index dropped three per cent.

South Korea's Kospi fell 2.8 per cent, the most since February 5. Samsung Electronics dropped 2.2 per cent to 741,000 won, while Hyundai Motor Company, South Korea's largest automaker, slipped 2.2 per cent to 135,500 won.

While Kim doesn't want war, North Korea's National Defence Commission vice chairman O Kuk Ryol reportedly said North Korea was ready to counter any attacks from South Korea, according to the North Korea Intellectuals Solidarity group.

South Korean President Lee Myung Bak said yesterday the country would push for a UN censure against North Korea for the sinking of a naval ship.