TOKYO/SEOUL (Reuters) - Japan and South Korea raised the stakes on Tuesday in a dispute that threatens to disrupt global supplies of smartphones and chips, with South Korea denouncing Japanese reports it had transferred a sensitive chemical to North Korea.

FILE PHOTO: A truck drives between shipping containers at a container terminal at Incheon port in Incheon, South Korea, May 26, 2016. REUTERS/Kim Hong-Ji

At the root of the diplomatic row between the two U.S. allies is compensation demanded by Seoul for South Koreans forced to work for Japanese firms during World War Two.

It worsened last week when Japan said it would tighten curbs on exports of three materials crucial for advanced consumer electronics because trust with South Korea had been broken over the forced labor dispute.

The restrictions on exports of the material to South Korea could hit tech giants, such as Samsung Electronics Co Ltd 005930.KS and SK Hynix Inc 000660.KS, that supply chips to the likes of Apple Inc AAPL.O and Huawei Technologies Co Ltd.

It also underscores Japan’s grip on a vital link in the global supply chain that Prime Minister Shinzo Abe’s government is using as leverage, days before a parliamentary election.

In some of the sharpest comments yet, South Korean Industry Minister Sung Yun-mo urged Japan to “stop making groundless claims immediately”, an apparent response to a Japanese media report last week.

It quoted an unidentified senior member of Abe’s Liberal Democratic Party (LDP) as saying some hydrogen fluoride exported to South Korea had ultimately been shipped to North Korea.

Hydrogen fluoride, a chemical covered by the Japanese export curbs, can be used in chemical weapons. Japan has said it has seen “inappropriate instances” of South Korea’s export controls, but has not elaborated.

Asked about countermeasures, Sung said South Korea was reviewing “every possible plan”, but gave no details. The neighbors plan to hold talks on Friday, he added.

BITTER HISTORY

The dispute stems from Japan's frustration over what it sees as South Korea's failure to act in response to a ruling by one of its courts last October ordering Japan's Nippon Steel Corp 5401.T to compensate former forced laborers.

Japan says the issue of forced labor was fully settled in 1965 when the neighbors restored diplomatic relations.

The countries share a bitter history dating to Japan’s colonization of the Korean peninsula from 1910 to 1945, which saw forced use of labor by Japanese companies and the use of “comfort women”, a Japanese euphemism for girls and women, many of them Korean, forced to work in its wartime brothels.

The United States has been dismayed by the dispute and its new senior diplomat for East Asia, David Stilwell, will visit both countries on his first trip to the region this month.

A spokeswoman for the U.S. State Department said it was “critical to ensure strong and close relationships between and among our three countries in the face of shared regional challenges” including that posed by North Korea.

She said all U.N. member states were required to implement sanctions resolutions and added: “The United States and South Korea coordinate closely on our efforts related to (North Korea), and we mutually work to ensure that U.N. sanctions are fully implemented.”

The State Department said Stilwell, the assistant secretary of state for East Asia and the Pacific, would visit Japan from Thursday to Sunday and South Korea on July 17.

The export curbs come weeks ahead of a July 21 upper house election that Abe’s Liberal Democrats and their junior partner are expected to win with a solid majority.

“Unfortunately, the election is coming,” said one person familiar with the Japanese government’s thinking. “The LDP will do anything to solidify their support base.”

Lee Young-chae, a professor at Keisen University in Tokyo, also said politics seemed to be a factor.

“One issue that could lead to an election win seems to be rallying Abe’s conservatives and consolidating swing voters by showing an anti-South Korea, a tough stance toward South Korea,” Lee said. “And it seems to be working.”

‘WHITE LIST’

Japan on Tuesday raised the possibility of more measures against South Korea.

“Whether Japan implements additional measures depends on South Korea’s response,” Industry Minister Hiroshige Seko told a news conference.

Japan was “not thinking at all” of withdrawing the curbs, which did not violate World Trade Organization rules, he said.

South Korea raised the issue at a meeting of WTO member nations on Tuesday and will also raise it with U.S. officials in Washington, South Korean officials said.

Japan’s ambassador told the WTO that there was no trade embargo, but Tokyo had carried out an operational review needed to implement export controls based on security concerns, and had switched from applying “simplified” to “normal” procedures to South Korean trade.

President Moon Jae-in has said South Korea could not rule out countermeasures for damage to its firms. He is due to meet executives from top conglomerates on Wednesday.

Japan threatened last week to drop South Korea from a “white list” of countries with minimum trade restrictions, which would hit supplies of a wider range of items used in weapons production.

Japan’s halt of preferential treatment for the three materials used in consumer electronics forces exporters to seek permission for each individual shipment to South Korea, which takes about 90 days.