North Korea's deadly rain of shells has enraged South Koreans but also driven home their chilling dilemma -- how to deal with an unpredictable nuclear-armed neighbour while avoiding all-out war.

Compounding Seoul's strategic nightmare is uncertainty over the motivations of the hardline state and on whether China, the country with the most influence on North Korea, is willing to restrain its communist neighbour.

Tuesday's attack from the North follows the sinking of a South Korean warship this year that has been blamed on the isolated regime, and Pyongyang's surprise unveiling this month of a sophisticated nuclear facility.

South Korea's Premier Kim Hwang-Sik condemned as a "reckless act of savagery" the bombardment of the Yellow Sea island that killed two marines, wounded 18 people and reduced 19 houses to charred ruins.

Major newspapers labelled the first such attack since the 1950-53 Korean conflict a "war crime" and called for revenge, with the Dong-A Ilbo daily fuming that "a club is the only medicine for a mad dog".

But South Korean politicians, generals and citizens also know how much is at stake, having lived with the threat of full-scale war on the peninsula for decades.

The two Koreas have never signed a peace treaty, and just across the heavily fortified border, the North has hundreds of missiles targeted on Seoul, believed to include chemical and biological weapons.

"Because North Korea has less to lose, they are more apt to take steps that could lead to war," said Mark Fitzpatrick, a senior fellow at the International Institute for Strategic Studies in London.

"South Korea, although they have various means of responding, will be very careful and considerate in their response so as not to create an escalatory spiral in which North Korea has what's called 'escalation dominance'."

Professor Yang Moo-Jin of Seoul's University of North Korean Studies agreed that "despite the strong soundbites, what South Korea can do about this is quite limited."

"At best, it may irritate the North into further provocative acts to find an excuse to mount retaliatory attacks, but even that's a remote possibility," Yang said.

"The South may flex its military muscle by staging joint military exercises with the United States on a greater scale than usual," he said, shortly before the US and South Korea announced a four-day naval exercise starting Sunday.

Yang said that if South Korea, backed by the United States, sought to punish or condemn the North at the UN Security Council, veto-wielding members China and Russia would probably not support them.

"If China or Russia join any international condemnation against the North, Pyongyang would respond by carrying out a third nuclear test, test-firing an ICBM (intercontinental ballistic missile) and disclosing nuclear devices that might have been miniaturised enough to be loaded on top of missiles," he said.

Northeast Asia security expert Robert Dujarric agreed that "South Korean options are indeed limited", pointing to the response after an expert panel found North Korea torpedoed South Korean warship the Cheonan in March.

"My guess is that in the end Seoul and Washington will decide to prioritise avoiding escalation, though they will have to find a way to warn the North to avoid further provocations," said Dujarric, director of the Institute of Contemporary Asian Studies at Temple University in Tokyo.

"It's hard to operationalise this sort of policy, but what we have seen in recent years, including with the Cheonan, is that the South and US will indeed let the North get away with its provocations."

Many observers said the North Korean attack was aimed at boosting the standing of heir apparent Kim Jong-Un, the youngest son of leader Kim Jong-Il.

"It is a way of seeking US attention and demonstrating that the next North Korean leader, Kim Jong-Un, knows how to provoke, how to fight and how to be as unpredictable as his father," said Rory Medcalf, international security programme director of think-tank the Lowy Institute.

"The key here is China's role. China is the only power with real capacity to harm the regime in Pyongyang," he said.

However, the latest inter-Korean flare-up comes at a time when China has been engaged in a bitter territorial row with Japan, and has quarrelled with the United States over currencies, trade and human rights.

"Beijing knows that it needs a cooling-off period in its relations with Asia and with Washington after all that strife," said Medcalf.

"China's response will be a grand test of whether it puts the region's interests ahead of its own relations with its dangerous little brother in Pyongyang."

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