North Korea said on Thursday it was ripping up military agreements signed with the South in a step seen as a prelude to shutting down a joint factory park, just as Seoul staged anti-submarine drills in tense border waters.
Signs also emerged that China, the North's main benefactor and ally, is reviewing ties with the isolated state, a week after international investigators accused Pyongyang of torpedoing a South Korean warship in March. The sinking killed 46 sailors and sharply raised tensions in economically significant East Asia.
In the latest chapter of blistering rhetoric, North Korea accused the South of driving 10 years of developing ties into the ground and said it would scrap pacts between the two sides' militaries guaranteeing the safety of cross-border exchanges.
The move could push the North a step closer to severing a border link which provides access to a joint industrial complex in the North Korean city of Kaesong.
"We will completely repeal the military guarantee measures that our army is to enforce related to North-South cooperation exchange," the North's army chief of staff said in a notice carried by Pyongyang's official KCNA news agency.
It could also mean the beginning of the end for the Kaesong industrial project, where more than 100 South Korean firms use cheap local labor and rent to make consumer goods and has been one of a few legitimate sources of income for the North, worth tens of millions of dollars a year.
Mounting antagonism between the two Koreas has unnerved investors, worried the bitter rivalry could spill over into conflict.
The KCNA statement also said the North was cancelling agreements aimed at preventing confrontations in the waters off the peninsula's west coast and cutting off naval hotlines.
The North this week threatened to shut the last road link with the South if Seoul resumes loudspeaker propaganda broadcasts across their heavily armed border. It has warned of war if the South goes ahead with sanctions announced this week.
The South Korean naval exercise is aimed at better detecting intrusions by North Korean submarines after the sinking of the South Korean corvette Cheonan.
The drills, which also come after the South's military upgraded its alert level, are likely to further anger Pyongyang, which has already cut most ties with Seoul after it sanctioned the hermit state over the Cheonan's sinking.
Most analysts say that neither side is ready to go to war but warn there could be more skirmishes, especially along their disputed sea border off the west coast.
Traders said the issue continues to hang over the market, although it is no longer driving prices down as it did early in the week. The won ended a five-day losing streak as investors turned to the country's financial markets on the view that recent declines may have been excessive.
Washington is looking for ways to avoid the issue collapsing into conflict, with Secretary of State Hillary Clinton pressing Beijing to coax its North Korean ally into changing course.
Clinton, visiting Seoul on Wednesday, called on China to join efforts to pressure the North to change its ways. China almost single-handedly props up the North Korean government and its destitute economy.
U.S. officials traveling with Clinton said China has shown indications that it was rethinking its ties with Pyongyang.
South Korea will ask the U.N. Security Council as early as next week to take up the issue, its Yonhap news agency said.
South Korean officials anticipate some form of progress in China's response when Premier Wen Jiabao visits Seoul on Friday for a summit with President Lee Myung-bak.
The two will travel to the South Korean resort island of Jeju on Saturday for a regional summit that also involves Japanese Prime Minister Yukio Hatoyama, where the issue is likely to overshadow discussions on boosting trade.
North Korea's Supreme People's Assembly is scheduled to meet on June 7, two months after the rubberstamp parliament passed constitutional amendments that strengthened leader Kim Jong-il's powers. Experts say a major announcement is likely.