South Korea's new president called the nuclear dispute with the North "a grave threat to world peace," as the communist nation upstaged his inauguration Tuesday by test-firing a missile and accusing the United States of spying.

With Secretary of State Colin Powell on hand, Roh Moo-hyun was sworn in with booming artillery salutes, after news that rival North Korea had fired the missile, alarming nearby countries and sending regional stock markets into turmoil.

A North Korean diplomat at a summit of non-aligned nations in Malaysia downplayed the launch, saying "What big incident? Everybody has missiles." The missile was thought to be a short-range, anti-ship missile not a long-range ballistic one.

Powell said U.S. officials had heard that such a launch was impending and said it was "not surprising."

"It seems to be a fairly innocuous kind of test," he told reporters after the inauguration.

But the timing of the launch appeared to be an attention-getting measure to the new president, who has pledged to push a policy of engaging the North while charting a more independent course from South Korea's top ally, the United States. It also fanned worries in an international standoff over North Korea's suspected nuclear weapons program.

Later Tuesday, North Korea said an American reconnaissance plane intruded into its air space on a spying mission, in what the North's official Korean Central News Agency said was "a premeditated move to find an opportunity to mount a pre-emptive attack" on the North.

North Korea regularly makes such accusations. The U.S. military had no comment on the claim, but has said in the past its maneuvers are defensive.

In his inauguration speech, Roh detailed a "policy for peace and prosperity" and acknowledged that "the suspicion that North Korea is developing nuclear weapons poses a grave threat to world peace."

But Roh said in his inauguration address that the first steps in calming jitters should be dialogue with the isolated country and building "mutual trust."

He said North Korea could win assistance from the international community if gives up its nuclear ambitions. Tensions have run high since October, when the United States said North Korea admitted having a secret nuclear weapons program.

"It is up to Pyongyang whether to go ahead and obtain nuclear weapons or to get guarantees for the security of its regime and international economic support," Roh said after being sworn in on the steps of National Assembly building.

Hours before his speech, South Korean officials announced that North Korea had fired the missile. South Korean officials described the missile as a small, conventional one not capable of reaching Japan or beyond.

A senior State Department official accompanying Powell described it as short-range and said it was fired from Hamkyong Province in northeastern North Korea.

The launch's effects were felt far away, where people still remember a 1998 missile test by that sent a missile soaring over Japan -- proving that North Korea has the capacity to strike the heart of the world's second biggest economy.

Tokyo's main stock index fell more than 2 percent after the news Tuesday, while shares in Seoul, the South Korean capital, tumbled more than 3 percent.

In 2001, North Korea imposed a voluntary moratorium on long-range ballistic missile testing through 2003. The North reaffirmed the moratorium after a meeting of Japanese Prime Minister Junichiro Koizumi and North Korean leader Kim Jong Il on Sept. 17.

Roh, a 56-year-old former human rights lawyer untested in global affairs, did not address the missile test in his speech.

Col. Kim Sung-ok, an officer at South Korea's Joint Chiefs of Staff, called the missile launch a normal exercise. "We believe that this is part of North Korea's usual tests of its weapons during the military exercise," he said.

Roh faces a difficult task of reconciliation with the North, which has repeatedly spurned international calls to abandon its nuclear development and demanded a nonaggression treaty with the United States.

But the new president also faces frayed relations with the United States. Roh has been outspoken about wanting the United States to open talks with North Korea and openly opposes any talk of attacking the North's nuclear facilities.

Washington, which is preparing for a possible war against Iraq, has said it wants a diplomatic solution to the North Korean problem. But President Bush ruled out direct talks and has said "all options" are on the table.

On Tuesday, Powell said he tried to reassure Roh that the United States has no intention of making military moves against North Korea. "There are no armies on the march," Powell said.

Powell also said the United States will pledge up to 100,000 tons of food aid to North Korea this year.

Roh won a Dec. 19 election partly by appealing to younger voters with pledges to put the U.S.-South Korean relationship on more equal footing.

U.S. troops fought alongside South Korean soldiers in the 1950-53 Korean War and there are still 37,000 American troops based in the South.

The new president has said he wants to re-examine laws that govern the conduct of the American military in South Korea. Critics say the laws allow GIs to get away with crimes at South Korea's expense.

Since the nuclear standoff began in October, the United States and its allies has halted oil shipments to the North, while Pyongyang has withdrawn from the global Nuclear Nonproliferation Treaty and taken steps to reactivate frozen nuclear facilities. North Korea has also threatened to abandon the armistice that ended the Korean War five decades ago.