* North Korea says hydrogen bomb designed for new ICBM
* Magnitude 6.3 quake represents North's most powerful detonation
* Trump rebukes Seoul, says it is trying to appease Pyongyang
* Global markets in flight to safety, gold and yen rally
UN Security Council to meet Monday to discuss test
By Christine Kim and David Brunnstrom
SEOUL/WASHINGTON, Sept 4 (Reuters) - South Korea's military carried out a missile drill on Monday in response to North Korea's sixth nuclear test, while global markets reacted to the sharp escalation in tensions between Pyongyang and the United States.
The United Nations Security Council was set to meet later on Monday to discuss fresh sanctions against the isolated regime and U.S. President Donald Trump had asked to be briefed on all available military options, according to his defence chief.
South Korea's air force and army conducted drills involving long-range air-to-surface missiles and ballistic missiles, the joint chiefs of staff said in a statement. Monday's drill was carried out only by the South Korean military, but more were being prepared with U.S. forces in the country, it said.
North Korea said on Sunday it had tested an advanced hydrogen bomb for a long-range missile, prompting the threat of a "massive" military response from the United States if it or its allies were threatened.
"Any threat to the United States or its territories, including Guam or our allies, will be met with a massive military response, a response both effective and overwhelming," U.S. Defense Secretary Jim Mattis said outside the White House after meeting Trump and his national security team.
"We are not looking to the total annihilation of a country, namely North Korea," Mattis said. "But as I said, we have many options to do so."
Despite the tough talk, the immediate focus of the international response was expected to be on tougher economic sanctions against Pyongyang.
Diplomats have said the United Nations Security Council could now consider banning Pyongyang's textile exports and the North's national airline, stop supplies of oil to the government and military, prevent North Koreans from working abroad and add top officials to a blacklist to subject them to an asset freeze and travel ban.
U.S. Treasury Secretary Steve Mnuchin said on Sunday he would put together a package of new sanctions to potentially cut off all trade with North Korea.
"If countries want to do business with the United States, they obviously will be working with our allies and others to cut off North Korea economically," Mnuchin told Fox News.
North Korea, which carries out its nuclear and missile programmes in defiance of U.N. Security Council resolutions and sanctions, said on state television the hydrogen bomb test ordered by leader Kim Jong Un had been a "perfect success".
The bomb was designed to be mounted on its newly developed intercontinental ballistic missile (ICBM), it said.
The test had registered with international seismic agencies as a man-made earthquake near a test site. Japanese and South Korean officials said the tremor was about 10 times more powerful than the one picked up after North Korea's previous nuclear test a year ago.
The Japanese yen, gold and sovereign bonds all rose early on Monday as North Korea's latest nuclear test provoked the usual knee-jerk shift to safe havens, while futures pointed to a difficult day for global equities.
Japan is the world's largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus pushing up the yen. Many wonder, however, if Japanese assets would really remain in favour if war actually broke out in Asia.
South Korea's finance minister vowed to implement policies to support financial markets if instability caused by North Korea's latest nuclear weapon test showed signs of spreading to the real economy.
"We are aware that there could be negative ripple effects should geopolitical risks resurface," Kim Dong-yeon said in a policy meeting urgently scheduled with the central bank and financial regulators before financial markets opened.
After weeks of profound tensions over North Korea's nuclear programme, the size and scope of the latest test set off a new round of diplomatic handwringing.
Chinese President Xi Jinping and Russian President Vladimir Putin, who met on the sidelines of a BRICS summit in China, agreed to "appropriately deal" with North Korea's nuclear test, China's official Xinhua news agency reported.
As North Korea's main ally, China said it strongly condemned the nuclear test and urged Pyongyang to stop its "wrong" actions.
In a series of early morning tweets, Trump appeared to rebuke ally South Korea, which faces an existential threat from North Korea's nuclear programme.
"South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!" Trump said on Twitter.
South Korea's new president, Moon Jae-in, has argued for continuing dialogue with its neighbour over its nuclear programme, while also supporting international sanctions.
A former senior State Department official criticised Trump for accusing South Korea of appeasement.
"It was unseemly, unhelpful, and divisive to gratuitously slap our major ally at the very moment when the threat from (North Korea) has reached a new height," said the official, who spoke on condition of anonymity.
Reports that the United States was considering pulling out of its trade deal with South Korea have also ratcheted up tensions.
Trump has previously vowed to stop North Korea developing nuclear weapons and said he would unleash "fire and fury" if it threatened U.S. territory.
Under third-generation leader Kim, North Korea has been pursuing a nuclear device small and light enough to fit on a long-range ballistic missile without affecting its range and making it capable of surviving re-entry.
Pyongyang tested two ICBMs in July that potentially could fly about 10,000 km (6,200 miles), putting many parts of the U.S. mainland within range and prompting a new round of tougher international sanctions.
Hours before the test, North Korean state news agency KCNA released pictures showing Kim inspecting a silver, hourglass-shaped warhead during a visit to the North's nuclear weapons institute.
KCNA said North Korea "recently succeeded" in making a more advanced hydrogen bomb. It says its weapons programmes are needed to counter U.S. aggression.
(Additional reporting by Shin-hyung Lee, Cynthia Kim in SEOUL, Steve Holland in WASHINGTON; Writing by Lincoln Feast; Editing by Paul Tait)