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UPDATE 1-South Korea, Japan to end expanded currency swap deal

* Deal on expanded swaps to expire end-Oct as scheduled

* Agreement comes amid diplomatic dispute over islands

* Seoul cites market stability, increased soundness

* For factbox, double-click on

(Updates with official comments)

SEOUL, Oct 9 (Reuters) - South Korea and Japan have agreedto let their expanded currency swap arrangements introduced ayear ago expire at the end of this month as scheduled, the twoannounced on Tuesday, citing increased financial marketstability.

The agreement to end the expanded swap arrangements, whichhave helped boost defences against the risk of a potentialcapital flight, come at a time when the two countries are at atense diplomatic standoff over disputed islands.

The value of bilateral currency swap arrangements betweenthe two neighbouring economic powerhouses will now return to $13billion from $70 billion previously, South Korea's central banksaid in a statement.

"(The two countries) have decided to let the arrangementsexpire after taking into account our significantly improvedexternal soundness and the increased stability in domestic andinternational financial markets," the Bank of Korea said.

(Reporting by Choonsik Yoo; Editing by David Chance andJacqueline Wong)

((choonsik.yoo@thomsonreuters.com)(+822 3704 5580)(ReutersMessaging: choonsik.yoo.thomsonreuters.com@reuters.net))

Keywords: KOREA JAPAN/SWAP