SEOUL (Reuters) - An outbreak of Middle East Respiratory Syndrome (MERS) threatens to deal a blow to South Korea's economic recovery, Moody's Investors Service said on Thursday, as the Health Ministry reported three new cases, the lowest daily increase in 17 days.

World Health Organization Director General Margaret Chan said the country's response, although initially slow, has been "exemplary."

"The MERS outbreak in (South Korea) can be stopped, although it may take a little longer than everyone would like to see," Chan, who arrived in South Korea on Thursday to attend a previously scheduled conference, told a media briefing.

There have been signs that the outbreak, the largest outside of Saudi Arabia, may be slowing. The daily number of new cases has dropped to single digits this week compared to as many as 23 last week. Three were reported on Thursday - the lowest number since June 1.

The outbreak has kept consumers from visiting malls and parks and led to more than 100,000 tourist visit cancellations, denting consumer spending. Worried by the economic impact, President Park Geun-hye and other leaders have urged the public and the business community to return to normal.

"The spread of the illness is credit negative for the sovereign, because it is dampening consumer confidence amid already-weak domestic demand, threatening to undermine an incipient recovery in economic growth," Moody's said.

Hotel Shilla Co Ltd said on Thursday it had shut its hotel on the holiday island of Jeju after it learned a guest who had stayed there last week has been diagnosed with MERS.

The finance minister has said it was considering a possible supplementary budget to bolster Asia's fourth-largest economy.

The blow from the MERS outbreak is unlikely to be serious enough to prompt a sovereign ratings downgrade, said Park Sang-hyun, a senior economist at HI Investment & Securities. South Korean debt is rated at Aa3 positive by Moody's, well within investment grade territory.

A total of 165 people have been infected with MERS and 23 have died in an outbreak that has been traced to a 68-year-old man who returned from a trip to the Middle East in early May.

The WHO said it expected new cases in coming weeks.

More than 6,700 people are in quarantine, either at home or in health facilities.

All of the infections known to have occurred in South Korea have taken place in healthcare facilities. Three hospitals have been at least partially shut and two have been locked down with patients and medical staff inside.

MERS is caused by a coronavirus from the same family as the one that triggered China's deadly 2003 outbreak of Severe Acute Respiratory Syndrome (SARS).

The vast majority of MERS infections and deaths have been in Saudi Arabia, where more than 1,000 people have been infected since 2012, and about 454 have died.

(Reporting by Jack Kim and Ju-min Park; Additional reporting by Christine Kim, Seungyun Oh and Yeawon Choi; Editing by Tony Munroe and Simon Cameron-Moore)