North Korea fired artillery close to a disputed maritime border with the South, prompting the South to fire back.
However, the military exercise appeared to be yet more sabre rattling from Pyongyang rather than a prelude to a sharp rise in tensions.
North Korea fired around 500 shells in the live exercise, around 100 of which landed on the South Korean side of the disputed maritime border, Seoul's Defence Ministry said.
"The North fired some 500 shots... and some 100 of them landed in waters south of the border," the Defence Ministry spokesman Kim Min-Seok told reporters.
The ministry said it believes North Korea was testing the South's determination to defend its sea border.
The North had flagged its intentions to conduct the firing exercise in response to UN condemnation of last week's missile launches by Pyongyang.
It has criticised what it said are threatening military drills in the South by US forces.
North Korea also accused the South of "gangster-like" behaviour at the weekend by "abducting" one of its fishing boats and threatened to retaliate.
The South said it had sent the boat back after it drifted into its waters.
One North Korean shell landed in South Korean waters, prompting marines from the South to fire back and Seoul scrambled F-15s on its side of the maritime border, according to defence officials in Seoul.
"It's up to the two militaries either to recognise or reject their own claimed line, and challenge the other's - this goes back and forth, so this is probably another episode of that," said Daniel Pinkston of the International Crisis Group.
The Northern Limit Line, a maritime border that wraps itself around a part of the North's coastline, has been the scene of frequent clashes and in 2010, four people were killed when North Korea shelled the South Korean island of Yeonpyeong.
Earlier that year, a South Korean naval vessel was sunk close to the line by what an international commission said was a North Korean torpedo, although the North denies involvement.
The line was drawn up at the end of the 1950-53 Korean War and North Korea does not recognise it.
The two sides are still technically at war as the conflict ended in a truce, not a treaty.
It was not clear how many shells were fired today but the residents of Baengnyeong island, the closest land to the firing area, were evacuated to bomb shelters as a precaution, a local government official said.
North Korea has stepped up its rhetoric in recent weeks and conducted a series of missile launches, mostly short range, in response to what it sees as the threat posed by a series of joint US-.South Korean military drills that are held annually.
The current drill called Foal Eagle ends on 18 April.
"At a time that South Korea and the United States are conducting military exercises using sophisticated equipment, the North is unlikely to be reckless enough to do anything that will lead to a sharp worsening of situation," said Yang Moo-jin, a professor at the University of North Korean Studies in Seoul.
North Korea threatened nuclear strikes against the South and the United States last year after the United Nations tightened sanctions against it for conducting its third nuclear test.