SEOUL (Reuters) - North Korea on Monday raised the stakes in its confrontation with Washington by sentencing two American journalists to 12 years hard labor for “grave crimes” while U.S. President Barack Obama’s spokesman said the two were innocent and should be freed.

Obama is due to meet with South Korean President Lee Myung-bak at the White House on June 16 to discuss a number of issues, expected to include including growing threats by North Korea which tested a nuclear bomb in May.

U.S. Secretary of State Hillary Clinton said on Sunday Washington was considering putting the reclusive North back on its list of states that sponsor terrorism, further isolating a country already facing additional United Nations sanctions.

The journalists, Euna Lee and Laura Ling, of U.S. media outlet Current TV, were arrested in March working on a story near the border between North Korea and China. The trial for the two, working for the company co-founded by former U.S. Vice President Al Gore, had opened on Thursday.

“The trial confirmed the grave crime they committed against the Korean nation and their illegal border crossing as they had already been indicted and sentenced each of them to 12 years of reform through labor,” the official KCNA news agency said in a brief dispatch.

In Washington, White House spokesman Robert Gibbs said the journalists’ fate should not be linked to the dispute over Pyongyang’s nuclear program.

The White House said in a statement Obama was “deeply concerned” and added: “We are engaged through all possible channels to secure their release.”

The journalists’ sentence seemed certain to deepen the chill in relations with the United States which has been trying for years to convince Stalinist North Korea to give up its ambition of becoming a nuclear weapons power.

“(North Korea) is using the sentence as bait to squeeze concessions out of the U.S. amid heightened tension,” said Lee Dong-bok, a senior associate with the CSIS think tank in Seoul and an expert on the North’s negotiating tactics.

South Korea’s main stock index dipped as the news of the sentencing weighed on sentiment. “Although this (fall) will probably be short-lived, there still are concerns the United States may take stringent measures in response,” said Lee Yun, a market analyst at Woori Investment & Securities.

Analysts say it would take a military clash at sea or on the border to have a major impact on global markets.

MILITARY GRANDSTANDING

Obama at the weekend called the North’s nuclear test, which was followed by a series of missile tests, “extraordinarily provocative” and said that this time there would be no appeasement by Washington.

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Communist North Korea kept up its rhetoric which is increasingly unnerving a region that accounts for a sixth of the world’s economy.

It threatened to retaliate with “extreme” measures if the United Nations punished it for the nuclear test.

“Our response would be to consider sanctions against us as a declaration of war and answer it with extreme hardline measures,” the North Korea’s official Rodong Sinmun newspaper said in a commentary.

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It also issued a no-sail warning off its east coast, up to 260 km (160 miles) off the Wonsan area from where it launched a short-range missile in May and a barrage of short-range missiles in 2006.

North Korea has said it would fire an intercontinental ballistic missile if the U.N. Security Council did not apologize for punishing it for its April rocket launch, widely seen as a disguised missile test that violated U.N. resolutions.

The North appears to be preparing a long-range missile for a test that could be conducted as early as this month. It also appears to be readying for tests of mid-range missiles that could strike anywhere in South Korea or most of Japan.

The Security Council may adopt a new resolution as early as this week, but members are divided on how to respond.

Japan wants a strong resolution to make it clear that such tests would not be forgiven and Clinton said last week Washington wanted the strongest possible resolution. China has said a “balanced” resolution was needed.

TERRORISM BLACKLIST

The United States removed North Korea from its terrorism blacklist in October in a bid to revive faltering six-party nuclear disarmament talks, prompting the North to take some measures to disable its nuclear facilities.

Pyongyang has since reversed those steps and said it had restarted the nuclear complex -- including reprocessing nuclear fuel to obtain weapons-grade plutonium.

China is seen as nervous of measures that might push its fragile neighbor into collapse, especially at a time when there is uncertainty of the health of leader Kim Jong-il, who is widely believed to have suffered a stroke last year.

Many analysts say the North’s belligerence may be aimed largely at a domestic audience, with Kim, 67, using it to bolster his position at home with the military and to better secure the succession for his youngest son Kim Jong-un.