North Korea expelled 11 South Korean government officials from their joint office in the industrial zone of Kaesong on Thursday, the Unification Ministry said.
North Korea said remarks by Unification Minister Kim Ha Joong last week that it would be difficult to expand the complex without progress in North Korea's denuclearisation was the reason for the expulsion, said a ministry spokesman.
"All responsibility resulting from the measure lies with the North Korean side," said a Unification Ministry spokesman.
Newly elected conservative President Lee Myung Bak said he will take a tough position on Pyongyang and link inter-Korean cooperation projects to progress in multilateral negotiations over North Korea's nuclear programmes - a sharp shift from his two liberal predecessors.
Lee called an emergency meeting on Thursday of his security-related ministers and aides to discuss the expulsion.
Talks on North Korea's denuclearisation, involving the US, China, Russia, Japan and the two Koreas, have been stalled since the end of 2007 over a dispute with the US on a declaration of the North's nuclear programmes and proliferation activities.
Despite Thursday's expulsion South Korea and North Korea went ahead with energy and economic aid working-level talks at the truce village of Panmunjom as scheduled, according to Yonhap news agency.
South Korea agreed to provide Pyongyang with fuel and other aid under the multilateral nuclear deal signed last year and the two-day meeting is to discuss the technicalities of delivering the aid.
The Kaesong industrial zone, located just in north of the heavily armed inter-Korean border, is a symbol of the 2000 inter-Korean summit in which the leaders reached an agreement on peace and reconciliation.
There are 69 South Korean factories employing 23,953 North Korean workers in the industrial zone, which the two Koreas agreed to expand at their second summit last year.
Five South Korean civilians are now working at the Kaesong office.