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 agreed to let their expanded currency swap arrangements introduced a year ago expire at the end of this month as scheduled, the two announced on Tuesday, citing increased financial market stability.

The agreement to end the expanded swap arrangements, which have helped boost defences against the risk of a potential capital flight, come at a time when the two countries are at a tense diplomatic standoff over disputed islands.

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

"(The two countries) have decided to let the arrangements expire after taking into account our significantly improved external soundness and the increased stability in domestic and international financial markets," the Bank of Korea said.

(Reporting by Choonsik Yoo; Editing by David Chance and Jacqueline Wong)

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