Seoul says it has decided to withdraw the roughly 175 South Koreans still at a jointly run factory complex in North Korea.
The statement by the country's minister in charge of inter-Korean relations raises a major question about the future of the last major symbol of inter-Korean co-operation.
The announcement follows an earlier North Korean rejection of a South Korean demand for talks on the factory park that has been closed nearly a month.
Both sides warned of taking "grave measures" over the dispute but did not say what they might be.
Seoul says it's worried about its workers not having access to food and medicine.
Pyongyang's powerful National Defence Commission earlier said Seoul's demand for working-level talks was deceptive and that ongoing US-South Korean military drills and the spreading of anti-North Korea leaflets at the border were proof of Seoul's insincerity.
The war of words calls into question the future of the complex.
The park in the North Korean border town of Kaesong is the most significant casualty so far in the recent deterioration of relations between the Koreas.
The statements on Kaesong follow what had been something of a lull after a weeks-long tirade of warlike North Korean rhetoric that included threats of nuclear war and missile strikes. Tension rose as Seoul responded with its own tough language to Pyongyang's outburst, which was unusually violent, even by the standards of the already hostile relationship between the Koreas