South Korea has returned fire into North Korean waters after shells from a North live-fire drill fell into the rivals' disputed western sea boundary.
People living on a front-line South Korean island said they were evacuated to shelters during the exchange.
No shells from either side were fired at any land or military installations, South Korea's Joint Chiefs of Staff said.
Kang Myeong-sung, speaking from Yeonpyeong island, in sight of North Korean territory, said anxious islanders were huddled together in shelters. He said he did not see any fighter jets, but could hear the boom of artillery fire.
In 2010, North Korean artillery killed four South Koreans on Yeonpyeong.
The exchange of fire followed Pyongyang's earlier, unusual announcement that it would conduct the live-fire drills, a move seen as an expression of its frustration at making little progress in its recent push to win outside aid.
The North has in recent weeks increased threatening rhetoric and conducted a series of rocket and ballistic missile launches that are considered acts of protest against annual springtime military exercises by Seoul and Washington.
The North calls the South Korea-US drills a rehearsal for invasion and the allies say they are routine and defensive.
Pyongyang threatened yesterday to conduct a fourth nuclear test at some point, though Seoul said there were no signs of an imminent detonation.
After the North's earlier announcement that it would conduct firing drills in seven areas north of the sea boundary, South Korea responded that it would react strongly if provoked.
Pyongyang routinely test-fires artillery and missiles into the ocean, but it is rare for the country to disclose such training plans in advance. Wee Yong-sub, a deputy spokesman at the South Korean Defence Ministry, said the North Korean message was a "hostile" attempt to heighten tension on the Korean Peninsula.
The poorly-marked western sea boundary has been the scene of several bloody naval skirmishes between the Koreas in recent years. In 2010 North Korea launched artillery strikes on a front-line South Korean island near the boundary, killing four. Pyongyang said it was responding to earlier South Korea's artillery drills that day.
Last spring, tension spiked after a near-daily barrage of North Korean threats, including warnings of nuclear strikes against Seoul and Washington, following international criticism of Pyongyang's third nuclear test in February last year.
The North has since gradually dialed down its threats and sought improved ties with South Korea in what foreign analysts say is an attempt to lure international investment and aid. There has been no major breakthrough in the North's reported push to win outside aid, however, with Washington and Seoul calling on the North to first take disarmament steps to prove its sincerity about improving ties, analysts say.
The North Korean live-fire drills and the country's hints at a nuclear test are meant to express anger and frustration over what the North sees as little improvement in progress in its ties with South Korea and the US, said Lim Eul Chul, a North Korea expert at South Korea's Kyungnam University.
Mr Lim said the North might conduct a fourth nuclear test and launch other provocations to try to wrest the outside concessions it wants.
The Korean Peninsula remains in a technical state of war because the 1950-53 Korean War ended with an armistice, not a peace treaty. About 28,500 American troops are deployed in South Korea to deter potential aggression from North Korea.
The White House said North Korea's actions are "dangerous and provocative" and will further aggravate tensions in the region.
White House spokesman Jonathan Lalley said North Korea's continuous threats and provocations will only deepen its isolation.
He said the US remains steadfast in its commitment to the defence of its allies and is working in close co-ordination with South Korea and Japan.