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The South's military was placed on its highest non-wartime alert after the shells landed on Yeonpyeong island.
Pyongyang accused the South of firing first. The Southern military said it had conducted exercises but shelling was directed away from the North.
This is one of the worst clashes since the Korean War ended, analysts say.
There have been occasional cross-border incidents since the conflict ended without a peace treaty in 1953, but the latest comes at a time of rising regional tension.
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The move prompted the US to rule out the resumption of six-party talks on nuclear disarmament that Pyongyang abandoned two years ago.
White House press secretary Robert Gibbs called on North Korea to "halt its belligerent action", adding that the US was "firmly committed" to South Korea's defence.
An emergency session of the United Nations Security Council could be held on Tuesday or Wednesday, a French diplomatic source said.
Koreas in border artillery clash
South Korea says it has returned fire after North Korea fired dozens of artillery shells at one of its border islands, killing two marines.
The South's military was placed on its highest non-wartime alert after the shells landed on Yeonpyeong island.
Pyongyang accused the South of firing first. The Southern military said it had conducted exercises but shelling was directed away from the North.
This is one of the worst clashes since the Korean War ended, analysts say.
There have been occasional cross-border incidents since the conflict ended without a peace treaty in 1953, but the latest comes at a time of rising regional tension.
Yeonpyeong island
- Lies 3km (2 miles) from disputed Yellow Sea border and 12km from North Korean coast
- Houses military installations, a permanent Marine detachment and a small civilian population
- Rich fishing grounds in surrounding waters
- Scene of inter-Korean naval clashes in 1999 and 2002
- In the 2002 exchange of fire, 13 Northern sailors and five Southern sailors were killed
North Korea's reclusive leader Kim Jong-il is thought to be ill and trying to ensure the succession of his youngest son.
On Saturday, it emerged that North Korea had also shown off what it claimed was a new uranium enrichment facility to an American scientist. The move prompted the US to rule out the resumption of six-party talks on nuclear disarmament that Pyongyang abandoned two years ago.
White House press secretary Robert Gibbs called on North Korea to "halt its belligerent action", adding that the US was "firmly committed" to South Korea's defence.
An emergency session of the United Nations Security Council could be held on Tuesday or Wednesday, a French diplomatic source said.
'Unpardonable'
A spokesman for South Korea's Joint Chiefs of Staff said North Korean shells had started falling in the waters off the island of Yeonpyeong at 1434 local time (0534 GMT).
At least 50 landed directly on the island, most hitting a South Korean military base there.
The South's military immediately fired back some 80 shells in self-defence, Col Lee Bung-woo added. At least 16 South Korean marines and three civilians were injured in the clashes.
The shelling of Yeonpyeong fits into the same pattern. From the North Korean viewpoint, this is about establishing deterrence over the South and defending its interests. But it is also a wider demonstration to the world of the North's power and an indication of some kind of political transition.
Quite what is going on in Pyongyang is impossible to say. Nonetheless, there are strong indications that Kim Jong-il has designated his son, Kim Jong-un as his successor. This opens up a period of uncertainty and unpredictability and this kind of incident is exactly what observers most feared.
Continue reading the main story
Local government spokesman Yoon Kwan-seok said the shelling lasted for about an hour and then stopped abruptly.
"The whole of Yeonpyeong island was blacked out following the North Korean attacks," he was quoted as saying by the Yonhap news agency. "All of the island's 1,600-odd residents were evacuated to shelters."
The South Korean military has also deployed fighter jets to Yeonpyeong, which lies about 3km (1.8 miles) south of the disputed inter-Korean maritime border and 100km (60 miles) west of the Korean Peninsula. It said the "inhumane" attack on civilian areas violated the 1953 armistice halting the Korean War.
Later, South Korean President Lee Myung-bak warned North Korea that his country would "sternly retaliate against any further provocations".
"North Korea's shelling of Yeonpyeong island constitutes a clear armed provocation. Furthermore, its reckless shelling of civilian targets is unpardonable," his office said in a statement.
A spokesman for South Korea's Joint Chiefs of Staff said North Korean shells had started falling in the waters off the island of Yeonpyeong at 1434 local time (0534 GMT).
At least 50 landed directly on the island, most hitting a South Korean military base there.
The South's military immediately fired back some 80 shells in self-defence, Col Lee Bung-woo added. At least 16 South Korean marines and three civilians were injured in the clashes.
Analysis
Nobody needed any reminder of the volatility of the relations between North and South Korea, nor of the sensitivity of their disputed maritime border. In March, a South Korean warship was sunk by an explosion and an investigation indicated strongly that the North was responsible.The shelling of Yeonpyeong fits into the same pattern. From the North Korean viewpoint, this is about establishing deterrence over the South and defending its interests. But it is also a wider demonstration to the world of the North's power and an indication of some kind of political transition.
Quite what is going on in Pyongyang is impossible to say. Nonetheless, there are strong indications that Kim Jong-il has designated his son, Kim Jong-un as his successor. This opens up a period of uncertainty and unpredictability and this kind of incident is exactly what observers most feared.
A resident on the island told the AFP news agency that dozens of houses were damaged by the barrage, while television pictures showed plumes of smoke rising above the island.
"Houses and mountains are on fire and people are evacuating. You can't see very well because of plumes of smoke," a witness on the island told YTN television station. "People are frightened to death."Local government spokesman Yoon Kwan-seok said the shelling lasted for about an hour and then stopped abruptly.
"The whole of Yeonpyeong island was blacked out following the North Korean attacks," he was quoted as saying by the Yonhap news agency. "All of the island's 1,600-odd residents were evacuated to shelters."
The South Korean military has also deployed fighter jets to Yeonpyeong, which lies about 3km (1.8 miles) south of the disputed inter-Korean maritime border and 100km (60 miles) west of the Korean Peninsula. It said the "inhumane" attack on civilian areas violated the 1953 armistice halting the Korean War.
Later, South Korean President Lee Myung-bak warned North Korea that his country would "sternly retaliate against any further provocations".
"North Korea's shelling of Yeonpyeong island constitutes a clear armed provocation. Furthermore, its reckless shelling of civilian targets is unpardonable," his office said in a statement.
"North Korean authorities must take responsibility."
But North Korea's supreme military command blamed South Korea for the incident.
"The South Korean enemy, despite our repeated warnings, committed reckless military provocations of firing artillery shells into our maritime territory near Yeonpyeong island beginning 1300 (0400 GMT)," the state-run KCNA news agency quoted it as saying.
The North would "continue to make merciless military attacks with no hesitation if the South Korean enemy dares to invade our sea territory by 0.001mm", it warned.
"It is our military's traditional response to quell provocative actions with a merciless thunderbolt."
It did not say whether North Korea suffered any casualties or damage.
South Korean military officials later said that it had been conducting regular military drills in the sea off Yeonpyeong before the incident, but that no fire was aimed towards North Korea.
"We were conducting usual military drills and our test shots were aimed toward the west, not the north," one official told Reuters news agency.
'Colossal danger'
There was more condemnation of North Korea from Russia, EU and the UK, although China - the North's main ally - refused to apportion blame.
A spokesman for the Chinese foreign ministry said that both countries should "do more to contribute to peace".
"What's imperative now is to restart six-party talks as soon as possible," Hong Lei told a news conference in Beijing.
Japan's Prime Minister, Naoto Kan, said he had ordered ministers to prepare for any eventuality.
Many residents of Yeonpyeong fled the island by ferry after the bombardment Russia's foreign minister warned of a colossal danger, and said those behind the attack carried a huge responsibility.
The BBC's John Sudworth in Seoul says news of the incident has caused concern on international financial markets, with both the Korean won and Japanese yen falling, but there is no sign of panic in the South Korean capital.
The Bank of Korea said it would hold an emergency meeting to assess the possible market impact.
This western maritime border, also known as the Northern Limit Line, has been the scene of numerous clashes in the past.
In March, a South Korean warship went down near the border with the loss of 46 lives. International investigators say a North Korean torpedo sank the ship, although Pyongyang has denied any role in the incident.
Since then relations between the two neighbours have remained tense.
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