North Korea said Thursday that it will scrap an accord aimed at preventing accidental naval clashes with South Korea after Seoul blamed Pyongyang for a torpedo attack that sank a South Korean warship.

Thousands of South Koreans, including veterans, take part in an anti-North Korea rally at the Seoul City Hall Plaza on Thursday. (Jo Yong-Hak/Reuters)

Tension on the divided peninsula has risen dramatically since a team of international investigators said last week that a torpedo fired by a North Korean submarine tore apart and sank a South Korean warship on March 26, killing 46 sailors.

North Korea has denied its involvement in the sinking and warned any retaliation would mean war.

On Thursday, North Korea's military said it will "completely nullify" an inter-Korean accord aimed at preventing accidental armed skirmishes along the disputed western sea border — a scene of three bloody maritime battles between the two Koreas.

"Immediate physical strikes will be launched," against any South Korean ships that intrude into North Korean waters, the country's military said in a statement, carried by the official Korean Central News Agency.

It said it will also start a review to possibly ban South Korean personnel and vehicles from entering a joint industrial park in the North Korean border town of Kaesong — the last remaining major inter-Korean reconciliation project. It gave no timeframe, however.

The military said the measures are its first-phase reaction to "the reckless moves of the group of traitors and confrontation maniacs," suggesting that more could follow.

A South Korean Defence Ministry official said South Korea will "resolutely" deal with the North's measures, though did not elaborate. He spoke on condition of anonymity, citing department policy.

The announcement came hours after a fleet of South Korean warships staged a large-scale anti-submarine drill off the west coast despite North Korea's warnings that such exercises will drive the peninsula to the brink of war.

The two Koreas are still technically at war because their 1950-53 conflict ended with an armistice, not a peace treaty. The U.S. stations 28,500 troops in South Korea, a legacy of the Korean War.

South Korean troops on alert

South Korean and U.S. troops are on their highest alert since North Korea's second nuclear test in May last year, reports said.

In this May 19, 2010 photo, navy members stand guard near the wreckage of the naval vessel Cheonan, which was sunk on March 26 near the maritime border with North Korea. (Lee Jae-Won/Reuters)

The mass-circulation JoongAng Ilbo newspaper, citing an unidentified Seoul official, reported Thursday the South Korean-U.S. combined forces command raised their surveillance level called Watch Condition, up a level from 3 to 2. Level 1 is the highest.

South Korea, backed by the U.S., Japan and other allies, has begun carrying out punitive measures that range from slashing trade and resuming propaganda warfare to barring the North's cargo ships — the strongest it can implement short of military action.

North Korea quickly responded by threatening to cut ties with South Korea, wage "all-out counterattacks" against psychological warfare operations and bar South Korean ships and airliners from its waters and airspace.

"We will never tolerate the slightest provocations of our enemies, and will answer to that with all-out war," North Korean Maj. Gen. Pak Chan Su, a Korean War veteran, told broadcaster APTN in Pyongyang. "This is the firm standpoint of our People's Army."

South Korea pressed ahead Thursday with anti-submarine drills to boost readiness against any North Korean provocations.

During a one-day exercise off the west coast, 10 warships fired artillery and other naval guns and dropped anti-submarine bombs off Taean, about 150 kilometres south of Seoul, the navy said.

South Korea is also planning two major joint military drills with the U.S. off the west coast by July in a display of force intended to deter future aggression by North Korea.

North Korean state media, citing the drills, criticized South Korea on Wednesday for "driving the situation to the brink of explosion."