North Korea has declared it will sever all communication and relations with the South for blaming it for the sinking of a South Korean warship.
The North also said it would expel all South Koreans working at a joint factory park in the northern border town of Kaesong.
Tensions were rising on the divided Korean peninsula in the wake of the investigation which blamed North Korea for the torpedo attack that sank the Cheonan warship on March 26, killing 46 South Korean sailors.
South Korea's military restarted psychological warfare operations — including blaring radio broadcasts into the North and placing loudspeakers at the border to blast out propaganda — to punish the North.
The South is also slashing trade and denying permission to North Korean cargo ships to pass through South Korean waters. North Korea struck back by declaring it would cut all ties with the South until President Lee Myung-bak leaves office. South Korean ships and airliners will be banned from passing through its territory and the North will resume its own psychological warfare.
Earlier, one Seoul-based monitoring agency reported that North Korea's leader ordered its 1.2 million-member military to get ready for combat.
The North denies involvement in the sinking of the Cheonan, one of the South's worst military disasters since the 1950-53 Korean War, and has warned that retaliation would mean war.
North Korea is already subject to UN-backed sanctions following earlier nuclear and missile tests, and the steps announced by Seoul were seen as among the strongest it could take short of military action.