South Korea has suspended trade with the North and demanded an apology, after a report blamed Pyongyang for sinking a South Korean warship.
President Lee Myung-bak said those who carried out the attack, which killed 46 sailors, must be punished.
The US, which has 28,000 troops on the peninsula, has thrown its support behind South Korea, calling the defence of its ally unequivocal and pressing North Korea's only major ally, China, to rein in the North.
The mounting tension follows last week's findings by international investigators who accused North Korea of torpedoing the Cheonan corvette in March, killing 46 sailors in one of the deadliest clashes between the two since the 1950-53 Korean War.
‘I solemnly urge the authorities of North Korea ... to apologise immediately to the Republic of Korea (South Korea) and the international community,’ the South Korean President said in a nationally televised address.
President Lee said he would take the issue to the UN Security Council whose past sanctions are already sapping what little energy the ruined North Korean economy has left.
His government also banned all trade, investment and visits with North Korea.
An angry North Korea warned it was ready to take stronger measures if the South escalated tension.
It also issued a statement repeating its position that it had the right to expand its nuclear deterrent.
UN Secretary-General Ban Ki-moon said he was confident the Security Council would take 'appropriate' measures regarding the sinking.
Mr Ban said: 'I'm confident that the council, in fulfilling its responsibility for the maintenance of international peace and security, will take measures appropriate to the gravity of the situation.'
