North Korean labourers did not show up for work on Tuesday at a factory complex operated with South Korea, companies with operations there said, effectively shutting down the zone for the first time since it began shipments in 2004.
Pyongyang's decision to halt work at the Kaesong industrial park coincided with speculation it would carry out a missile launch, or even another nuclear test, in what has become one of the worst periods of tension on the peninsula since the end of the Korean War in 1953.
About 475 South Korean workers and factory managers remain in Kaesong, a few kilometres inside the border with North Korea. The South Korean government said 77 would return on Tuesday.
Many South Koreans have been reluctant to leave, worried about the impact on their companies and jobs. "North Korean workers didn't come to work today, and production has halted in our Kaesong facilities," said a spokeswoman for Shinwon, a women's clothing maker.
A spokesman for textile company Taekwang Industrial and at least two other firms also said North Koreans workers did not show up on Tuesday and that production had stopped.
More than 100 representatives from businesses operating at Kaesong were holding an emergency meeting at the complex that started at about 0100 GMT, Reuters witnesses said.
An executive at another South Korean apparel firm running a factory in Kaesong said late on Monday his employees had told him they would stay.
"I don't know what to do, honestly. I can't simply tell my workers to leave or stay," said the executive, who requested anonymity.
Tension has been rising since the United Nations imposed new sanctions on the North for carrying out its third nuclear test in February. Pyongyang has been further angered by weeks of military exercises by South Korean and US forces and threatened both countries with nuclear attack.
Few experts had expected Pyongyang to jeopardise Kaesong, which accounts for $2 billion in annual trade and employs 50,000 North Koreans making household goods for 123 South Korean firms.
North Korea said on Monday it would suspend operations at the park, its sole remaining major project with the South. No decision had been made on closing Kaesong permanently, it said.
"They're using this as shock therapy because, regardless of what they say, if they close Kaesong the damage they will sustain will not be small," said Moon Seong-mook, a retired South Korean brigadier general who took part in previous military talks with the North.
"This is just another negotiating card they can use with South Korea."
The North's official KCNA news agency said Seoul was trying to "turn the zone into a hotbed of war" against the North. It did not elaborate.
North Korea has also bridled at suggestions from Seoul that it would keep the park open because it needed the cash. The zone generates more than $80 million a year in cash in wages - paid to the state rather than to the workers.
South Korean firms pay between $8 million and $9 million in wages a month for about 53,000 North Korean workers in Kaesong. Any delay in payment of those wages could become another flashpoint because the North could demand payment of interest on the delayed wages, Yonhap reported.
The turmoil has hit South Korean financial markets, which have usually shrugged off the North's rhetoric.
Seoul stocks have fallen nearly 3 percent since Wednesday, when the North first blocked access to the zone amid steep foreign selling. Shares in some firms known to have operations in Kaesong fell sharply on Tuesday.
The won currency has fallen by more than 2 percent against the dollar since access to the park was first barred.
"Sunshine Policy" clouds over
The zone is practically the last vestige of the "Sunshine Policy" of rapprochement between the two Koreas and a powerful symbol that the divided country could one day reunify.
South Korean companies are estimated to have invested around $500 million in the park since 2004.
But corporate giants such as Samsung Electronics and Hyundai Motor, the sort of companies that could sustain losses from the park's closure, do not have operations in Kaesong.
South Koreans had been leaving the park gradually in the past week as raw materials and food run out.
North Korean authorities told embassies in Pyongyang they could not guarantee their safety from Wednesday, after saying conflict was inevitable amid the joint US-South Korean military exercises due to last until the end of the month. No diplomats appear to have left the North Korean capital.
US secretary of state John Kerry visits Seoul this week and the North holds celebrations, and possibly military demonstrations, next Monday to mark the birth date of its founder, Kim Il-Sung - grandfather of the current leader, 30-year-old Kim Jong-un.
Pyongyang has shown no sign of preparing its 1.2 million-strong army for war, indicating the threats are partly intended for domestic purposes to bolster Kim, the third in his family dynasty to rule North Korea.
But it has moved what appears to be a mid-range Musudan missile to its east coast, according to media reports last week.
US deputy defense secretary Ashton Carter urged China -the North's sole financial and diplomatic backer - to use its influence with the North, something he said Moscow wanted Beijing to do as well.
"I think Russia, like others beholding this situation in North Korea, would like to see China exercise more of the influence that it evidently has with North Korea," Carter told a forum in Washington.
China's leaders rebuked North Korea at the weekend but most experts believe Beijing will not push too hard to punish Pyongyang because of concerns its troublesome neighbour could collapse.
Some experts also say China's influence over North Korea has waned over the years.