South Korea said after a rare emergency security meeting on Friday it would respond prudently to the sinking of one of its naval ships by the North, but Pyongyang warned the peninsula was being driven to war.
US Secretary of State Hillary Clinton strongly condemned North Korea's action and called for an international response.
The South announced on Thursday that it had overwhelming evidence a North Korean submarine had entered its waters in March and attacked the Cheonan corvette, killing 46 sailors in what President Lee Myung-bak called a "military provocation."
North Korea denied the accusation and said it was ready to tear up all agreements with the South, with whom it remains technically at war under a truce that ended fighting in the 1950-53 Korean War.
"It was a military provocation and violation of the UN Charter and the truce agreement," Lee, whose two years in office have seen relations with the North turn increasingly frosty, said in a statement.
"Since this case is very serious and has a grave importance, we cannot afford to have a slightest mistake and will be very prudent in all response measures we take," his office quoted him as telling a rare emergency National Security Council meeting.
Lee is expected to announce his response early next week.