As the Daewoo group struggles beneath a mountain of debt, South Korean markets, afraid of massive defaults, have been left in a state of nervous exhaustion as they wait to see the restructuring unfold.

In Friday's first development in the ongoing saga, Kim Tae-gou, president of Dewoo Motor, and Alan Perriton, president of GM Korea, signed a memorandum of understanding (MOU) to hold "serious talks" about a strategic alliance. "The talks can even include the handover of Daewoo's management right to GM," Kim told reporters.

The MoUwould limit the strategic alliance to passenger car business at home and abroad, he said. GM would buy either assets or a stake in Daewoo Motor's passenger car division.

Commerce, industry and energy minister Chung Duck-koo told Daewoo's creditors to be patient. "The restructuring of Daewoo is well designed, (and will be) well implemented and orderly," he told Reuters in an interview.

"Creditor banks should be careful and patient," said Chung, who has been involved in many of the government discussions about the restructuring of the country's second-largest conglomerate. Earlier this week some foreign creditors told the Daewoo Group that ties with it and "the Korean business community as a whole" would suffer if foreign creditors were not accommodated.

One of the group's major creditors, Korea First Bank, said on Friday that Daewoo also planned to sell its shipbuilding unit and to spin off a construction unit, which would then also be sold. "The plan is included in a restructuring draft handed by DaewooGroup," a Korea First Bank spokesman said.

The group's total debt of about $ 48 billion includes $ 9.9 billion in foreign debt, about half of which comes due at the end of this year. Creditors and the government are pushing Daewoo to get moving on a drastic restructuring plan.

Local creditors rescued it from bankruptcy last month with an emergency credit infusion of four trillion won and extension of the maturities on another 12 trillion won in commercial paper and corporate bonds, in exchange for 10 trillion won in collateral.

Daewoo has talked to foreign investors other than General Motors about strategic ties in its commercial vehicle division. "The MoU is aimed at making further progress in the earlier agreement Daewoo and GM reached in February, 1998," said Daewoo Motor president Kim. "We agreed serious strategic talks which will benefit both."

Daewoo has negotiated with GM about a possible stake sale or strategic alliance since the earlier agreement, with the talks covering a wide range ofalliances including financing and sales. But they failed to make much progress.

Perriton said GM would soon begin a due-diligence examination of Daewoo's assets and liabilites. Kim said his company had 28 trillion to 30 trillion won ($ 23 billion to $ 25 billion) in assets.

Kim and Perriton said they hoped to finalise a deal as soon as possible but said they had not set a deadline. The two would not reveal any details about the talks until the agreement was final, Daewoo said.

In Detroit, General Motors said on Thursday it did not have "solid plans" to buy a controlling stake in Daewoo Motor. "We're always in dialogue and we always stay open with all our options," GM spokesman Henry Wong said.

The South Korean stock market, which now routinely rises or falls according to daily sentiment and reports about Daewoo, slipped0.8 percent on Friday. ``Foreign investors seem to be more pessimistic about the fate of Daewoo," said Good Morning Securities broker Choi Chang-ho.