South Korea launched a live-fire military exercise on a border island on Monday, despite North Korean threats of deadly retaliation, as UN diplomacy on the regional crisis broke down.
But in an apparent sign of compromise over its nuclear ambitions, CNN said North Korea had agreed with US troubleshooter Bill Richardson to permit the return of UN atomic inspectors to ease tensions on the peninsula.
"The drill has started," a ministry spokesman said around 2:30 pm (0530 GMT). An AFP photographer sheltering in a bunker on Yeonpyeong island confirmed he heard the sound of artillery.
"Our armed forces are now on alert and jet fighters are on airborne alert," the ministry spokesman said.
Yonhap news agency said two destroyers had also been deployed in forward positions in the Yellow Sea.
An emergency UN Security Council meeting failed to agree a statement on the crisis, and Russia warned that the international community was now left without "a game plan" to counter escalating tensions.
After a similar exercise by marines based on Yeonpyeong on November 23, the North fired some 170 shells onto or around the island, killing four people including civilians and damaging dozens of homes.
It had threatened even deadlier retaliation if this week's drill went ahead, saying South Korean shells from such exercises regularly land in its waters.
The North disputes the Yellow Sea border drawn by United Nations forces after the 1950-53 Korean War. It claims the waters around Yeonpyeong as its own.
The North's military appears to be preparing for a counter-attack, removing covers from coastal artillery guns and forward-deploying some batteries, a military source told Yonhap.
But CNN correspondent Wolf Blitzer, who is travelling with Richardson in Pyongyang, said there were signs of deal-making.
North Korea had agreed with Richardson, a former US ambassador to the UN, to let inspectors from the UN's International Atomic Energy Agency go back to its Yongbyon nuclear facility, Blitzer said.
It had also agreed to allow fuel rods for the enrichment of uranium to be shipped to an outside country, and to the creation of a military commission and hotline between the two Koreas and the United States, Blitzer said.
A veteran negotiator with the reclusive communist state, New Mexico Governor Richardson was due to brief reporters in Beijing later Monday after ending his five-day visit to Pyongyang.
At the UN, China fended off Western demands that its ally North Korea be publicly condemned for the November 23 artillery assault, diplomats said.
They said it even rejected a proposed statement which did not mention North Korea or the name of Yeonpyeong.
"Now we have a situation with very serious political tension and no game plan on the diplomatic side," said Russia's UN envoy Vitaly Churkin.
The foreign ministers of China and Russia held telephone talks Saturday and urged South Korea to cancel its military exercise. But its ally the United States defended its right to self-defence.
Last month's bombardment was the first of civilian areas in the South since the war. It sparked outrage in the South, which rushed more troops and guns to frontline islands.
About 20 US soldiers -- part of a 28,500-strong force stationed in the South -- are on Yeonpyeong to provide back-up in the latest drill, the US military said.
Five delegates from the United Nations Command and the Military Armistice Commission, which supervises the truce that ended the war, are also on the island, another official said.
Apart from the military there are about 280 civilians including reporters on Yeonpyeong, which is 12 kilometres (seven miles) from the North's coast.
The North said on Saturday the upcoming exercise "would make it impossible to prevent the situation on the Korean peninsula from exploding and escape its ensuing disaster".
South Korea, heavily criticised for a perceived weak response to last month's bombardment, has vowed to hit back hard against any new attack.
It says the exercise is a routine defensive drill, with guns pointed away from the North and shells landing 10 kilometres (six miles) south of the sea border known as the Northern Limit Line.