Japan@ (Adds missile was likely intermediate range, updates markets)
* Trump: North Koreas message received "loud and clear"
* Missile flies 1,680 miles, reaches high altitude - S.Korea
* Test follows rise in tension during U.S.-S.Korea drills
WASHINGTON/SEOUL, Aug 29 (Reuters) - President Donald Trump warned on Tuesday that all options are on the table for the United States to respond to North Korea's firing of a ballistic missile over northern Japan's Hokkaido island into the sea in a new show of force.
The missile test further increased tension in east Asia as U.S. and South Korean forces conducted annual military exercises on the Korean peninsula, angering Pyongyang which sees the war games as a preparation for invasion.
North Korea has conducted dozens of ballistic missile tests under its leader, Kim Jong Un, in defiance of U.N. sanctions, but firing projectiles over mainland Japan is rare.
Trump, who has vowed not to let North Korea develop nuclear missiles that can hit the mainland United States, said the world had received North Koreas latest message "loud and clear".
"This regime has signalled its contempt for its neighbors, for all members of the United Nations, and for minimum standards of acceptable international behaviour," Trump said in a statement.
"Threatening and destabilising actions only increase the North Korean regimes isolation in the region and among all nations of the world. All options are on the table," he said.
Trump and Japanese Prime Minister Shinzo Abe spoke and agreed that North Korea "poses a grave and growing direct threat" to the United States, Japan and South Korea, the White House said.
World stocks tumbled, with Japan's Nikkei hitting a four-month low before paring losses to end down about 0.5 percent. The Dow Jones Industrial Average opened sharply lower before rebounding to trade largely unchanged.
Investors scampered to safe-haven assets, with gold jumping to its highest price since November and the benchmark U.S. 10-year treasury yield dipping to its lowest level since the day after the Nov. 8 U.S. presidential election.
The North Korean missile was likely an intermediate-range ballistic missile (IRBM) and further analysis was underway to determine whether it was a success or failure, two U.S. officials said. It appeared to be a KN-17, or Hwasong-12, according to initial data, they said.
The Pentagon said that diplomacy was still Washington's preferred option with North Korea.
"While all options are on the table, diplomacy is still in the lead," Pentagon spokesman Colonel Robert Manning told Reuters.
North Korea was defiant.
"The U.S. should know that it can neither browbeat the DPRK with any economic sanctions and military threats and blackmail nor make the DPRK flinch from the road chosen by itself," North Korea's official Rodong Sinmun said, using the initials of the North's official name, the Democratic People's Republic of Korea.
The North vows to never give up its weapons programs, saying they are necessary to counter hostility from the United States and its allies.
In China, North Korea's lone major ally, foreign ministry spokeswoman Hua Chunying said the crisis was "approaching a critical juncture", but it was also maybe a turning point to open the door to peace talks.
The United States has said before that all options, including military, are on the table, although its preference is for a diplomatic solution.
The United States is technically still at war with the North because their 1950-53 conflict ended in a truce, not a peace treaty. Relations worsened last year when North Korea staged two nuclear bomb tests.
Some experts in Asia said Kim was trying to pressure Washington to the negotiating table with the latest missile tests.
"(North Korea) thinks that by exhibiting their capability, the path to dialogue will open," Masao Okonogi, professor emeritus at Japan's Keio University, said by phone from Seoul.
"That logic, however, is not understood by the rest of the world, so it's not easy," he said.
South Korea's military said the missile was launched from near the North Korean capital, Pyongyang, just before 6 a.m. (2100 GMT on Monday) and flew 2,700 km (1,680 miles), reaching an altitude of about 550 km (340 miles).
Four South Korean fighter jets bombed a military firing range on Tuesday after President Moon Jae-in asked the military to demonstrate capabilities to counter North Korea.
South Korea and the United States had discussed deploying additional "strategic assets" on the Korean peninsula, the presidential Blue House said in a statement, without giving more details.
Earlier this month, North Korea threatened to fire four missiles into the sea near the U.S. Pacific territory of Guam after Trump said it would face "fire and fury" if it threatened the United States.
North Korea fired what it said was a rocket carrying a communications satellite into orbit over Japan in 2009 after warning of its plan. The United States, Japan and South Korea considered it a ballistic missile test.
The latest missile fell into the sea 1,180 km (735 miles) east of Hokkaido, the Japanese government said.
Japanese television and radio broadcasters broke into their regular programming with a "J-Alert" warning citizens of the missile launch. Bullet train services were temporarily halted and warnings went out over loudspeakers in towns in Hokkaido.
"I was woken by the missile alert on my cellphone," said Ayaka Nishijima, 41, an office worker on Honshu island.
"I didn't feel prepared at all. Even if we get these alerts there's nowhere to run. It's not like we have a basement or bomb shelter," she told Reuters by text message.
The U.N. Security Council earlier this month unanimously imposed new sanctions on North Korea in response to two long-range missile launches in July.
The Japanese military did not attempt to shoot down the missile, which may have broken into three pieces, Minister of Defence Itsunori Onodera said.
Experts say defences in Japan and South Korea designed to hit incoming missiles would struggle to bring down a missile flying high overhead.
(Additional reporting by Soyoung Kim in Seoul,; Malcolm Foster, Chris Gallagher, Chang-ran Kim and Linda Sieg in Tokyo, Idrees Ali, David Brunnstrom, David Alexander and Matt Spetalnick in Washington and Ben Blanchard in Beijing; Writing by Nick Macfie and Alistair Bell; Editing by Paul Simao)