South Korea's navy sank a North Korean torpedo boat and seriously damaged five patrol boats yesterday as a week-long Yellow Sea standoff escalated into a battle, officials said in Seoul.
South Korea put its military on maximum alert to ward off any retaliation following the clash. The communist North demanded an apology and warned of possible war.
Washington immediately rebuked Pyongyang for provoking the confrontation.
North Korea warned of "a dangerous situation in which a war may break out any time in Korea because of the reckless military provocations of the South Korean rulers", its Korean Central News Agency (KCNA) said.
It accused South Korean "warships" of intruding into its waters and demanded an immediate apology following the first armed clash in six months between the two sides, who remain technically at war.
The clash, the first in the Yellow Sea in two years, took place as South Korean vessels tried to ram two communist vessels out of its buffer zone, a move which prompted three North Korean torpedo boats to go to their rescue.
Defence officials in Seoul said an intense 10-minute heavy machine-gun battle erupted after a North Korean gunner opened fire on Seoul vessels which had rammed intruding North Korean boats.
"We shot back after North Korea opened fire first," said Col Hwang Dong-Kyu, spokesman for the joint chiefs of staff.
Last Friday, in a similar escalation of the standoff, South Korean ships repeatedly rammed North Korean vessels, forcing them back across the sea boundary.
The contested waters lie between the North Korean mainland and several South Korean islands about 100 km north-west of Seoul.
The UN demarcated the sea frontier in 1953 and created a buffer zone south of it to avoid armed clashes.
In its statement on the battle, the KCNA said one North Korean boat was sunk and three badly damaged yesterday. However, it said they had been in Northern waters and Pyongyang demanded an apology.
There was no word on the fate of the crew of the North Korean torpedo boat which was lost.
Seven South Korean sailors were wounded and five of their boats slightly damaged, the KCNA said.
Yesterday's confrontation ended with the Northern vessels retreating across the disputed border. But combat readiness was strengthened along South Korea's west coast amid a major alert.