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WRAPUP 2-S.Korea, U.S. plan more drills after N.Korea nuclear test rattles globe

globe@ (Adds detail on Chinese radiation monitoring, updates markets and adds market comment, adds impending approval of THAAD deployment in South Korea and analysis of Trump response, paragraphs 1, 4-5, 16-18, 27-28)

* 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

* Stocks down, safe havens firm but response cautious

* UN Security Council to meet Monday to discuss test

SEOUL/WASHINGTON, Sept 4 (Reuters) - South Korea said on Monday it was preparing fresh military drills with its ally the United States and ramping up its ballistic missile defenses in response to North Korea's sixth and most powerful nuclear test a day earlier.

The United Nations Security Council was set to meet later on Monday to discuss fresh sanctions against the isolated regime. U.S. President Donald Trump had also asked to be briefed on all available military options, according to his defense chief.

South Korea's air force and army conducted exercises involving long-range air-to-surface missiles and ballistic missiles on Monday, the joint chiefs of staff said in a statement. More drills were being prepared with U.S. forces in the South, it said.

South Korea's environment ministry will also announce on Monday its approval of an environmental assessment report for the deployment of a controversial U.S. anti-missile defense system, a ministry official told Reuters.

South Korea said in June it would hold off installing the remaining components of the Terminal High Altitude Area Defense (THAAD) system until it completed an assessment of its impact on the environment.

North Korea said Sunday's nuclear test was of an advanced hydrogen bomb for a long-range missile, prompting the threat of a "massive" military response from the United States.

"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."

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. That prompted the North to threaten to fire missiles towards the U.S. Pacific territory of Guam, although it has since appeared to back away from that threat.

TOUGHER SANCTIONS?

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 UN 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 programs in defiance of UN resolutions and sanctions, said on state television the hydrogen bomb test ordered by leader Kim Jong Un had been a "perfect success."

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.

China's National Nuclear Safety Administration said data from radiation monitoring stations near the North Korean border showed no impact on "China's environment or populace."

Japanese and South Korean stock markets were both down modestly on Monday, while safe haven assets including gold and sovereign bonds ticked higher, but trade was cautious.

"Assuming the worst on the Korean peninsula has not proven to be a winning trading strategy this year," said Sean Callow, a senior forex strategist at Westpac Bank. "Investors seem reluctant to price in anything more severe than trade sanctions, and the absence of another 'fire and fury' Trump tweet has helped encourage markets to respond warily."

South Korea's finance minister vowed to implement policies to support financial markets if instability caused by the latest 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.

ESCALATING CRISIS

The size and scope of the latest test set off a new round of diplomatic handwringing after weeks of profound tensions over North Korea's nuclear program.

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.

"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 dialog with its neighbor over its nuclear program, while also supporting international sanctions.

Still, Trump's response was more orderly and less haphazard than he had offered to other provocations by North Korea.

His handling of Pyongyang's latest nuclear test reflected a more traditional approach to crisis management, which U.S. officials said illustrated the influence of Mattis and new White House chief of staff, retired Marine Corps General John Kelly.

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 latest nuclear 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 programs are needed to counter U.S. aggression.

(Additional reporting by Shin-hyung Lee, Hyunjoo Jin, Cynthia Kim in SEOUL, Steve Holland and John Walcott in WASHINGTON, Wayne Cole in SYDNEY; Writing by Lincoln Feast; Editing by Paul Tait)