INCHEON, South Korea:  North and South Korea exchanged artillery fire Tuesday along their disputed frontier, raising tensions between the rivals to their highest level in more than a decade. The communist nation warned of more military strikes if the South encroaches on the maritime border by “even 0.0001 millimeter.”

Angry at South Korea’s refusal to halt military drills near their sea border, North Korea shelled the island of Yeonpyeong, and Seoul responded by unleashing its own barrage from K-9 155mm self-propelled howitzers and scrambling fighter jets. Two South Korean marines were killed in the shelling that also injured 15 troops and three civilians.

Officials in Seoul said there could be considerable North Korean casualties.

The confrontation lasted about an hour and left the uneasiest of calms, with each side threatening further bombardments.

North Korea’s apparent progress in its nuclear weapons program and its preparations for handing power to a new generation have plunged relations on the heavily militarized peninsula to new lows in recent weeks.

South Korea’s military was put on high alert after the shelling – one of the rivals’ most dramatic confrontations since an armistice halted the Korean War in 1953 and one of the few to put civilians at risk.

“I thought I would die,” said Lee Chun-ok, 54, an islander who said she was watching TV in her home when the shelling began. Suddenly, a wall and door collapsed.

“I was really, really terrified,” she told The Associated Press after being evacuated to the port city of Incheon, west of Seoul, “and I’m still terrified.”

The attacks focused global attention on the tiny island and sent stock prices down sharply worldwide. The dollar, US Treasury prices and gold all rose as investors sought safe places to park money. Hong Kong’s main stock index sank 2.7 percent, while European and US stock indexes fell between 1 and 2 per cent. The Dow Jones industrial average fell 165 points, or 1.5 percent, in afternoon trading.

South Korean President Lee Myung-bak, who convened an emergency security meeting shortly after the initial bombardment, said an “indiscriminate attack on civilians can never be tolerated.”

“Enormous retaliation should be made to the extent that (North Korea) cannot make provocations again,” he said.

The United States, which has more than 28,000 troops stationed in South Korea, condemned the attack. The White House said President Barack Obama was “outraged” by North Korea’s actions.

Top national security aides planned to meet later Tuesday to discuss the situation. The White House said it would work with its international partners to determine the appropriate next steps.

Gen. Walter Sharp, commander of US forces in South Korea and the US-led UN Command, said in a Facebook posting that the US military is “closely monitoring the situation and exchanging information with our (South Korean) allies as we always do.”

China, the North’s economic and political benefactor, which also maintains close commercial ties to the South, appealed for both sides to remain calm and “to do more to contribute to peace and stability on the peninsula,” Foreign Ministry spokesman Hong Lei said.

UN Secretary-General Ban Ki-moon condemned North Korea’s artillery attack, calling it “one of the gravest incidents since the end of the Korean War,” his spokesman Martin Nesirky said. Ban called for “immediate restraint” and insisted “any differences should be resolved by peaceful means and dialogue,” the spokesman said.

The clash “brings us one step closer to the brink of war,” said Peter Beck, a research fellow with the Council on Foreign Relations, “because I don’t think the North would seek war by intention, but war by accident, something spiraling out of control has always been my fear.”

South Korea holds military exercises like Tuesday’s off the west coast about every three months, and they typically provoke an angry response from North Korea, but Tuesday’s confrontation was far from typical.

Skirmishes flare up along the disputed border from time to time, but this clash follows months in which tensions have steadily risen to their worst levels since the late 1980s, when a confessed agent for North Korea bombed a South Korean jetliner, killing all 115 people aboard.

The communist regime in Pyongyang has sought to consolidate power at home ahead of a leadership transition and hopes to gain leverage abroad before re-entering international talks aimed at ending its nuclear weapons programs.

In March, North Korea was blamed for launching a torpedo that sank the South Korean warship Cheonan while on routine patrol, killing 46 sailors. South Korea called it the worst military attack on the country since the war. Pyongyang denied responsibility. South Korea did not retaliate for the sinking of the Cheonan.

Six weeks ago, North Korean leader Kim Jong Il anointed his youngest son, Kim Jong Un, heir apparent. This week, Pyongyang claimed it has a new uranium enrichment facility, raising concerns about its pursuit of atomic weapons.

South Korea faces an uphill struggle if it wants the UN Security Council to condemn North Korea for the attack or to impose a third round of sanctions, because it is likely to face opposition from veto-wielding China.

China agreed to two rounds of sanctions against Pyongyang after its nuclear tests in 2006 and 2009, and Seoul wanted the UN’s most powerful body to condemn North Korea for the Cheonan sinking. But North Korea warned that its military forces would respond if the council questioned or condemned the country over the sinking, and China opposed direct condemnation or a third round of sanctions. Yeonpyeong lies a mere seven miles (11 kilometers) from — and within sight of — the North Korean mainland. Famous for its crabbing industry, it is home to about 1,700 civilians as well as South Korean troops. There are about 30 other small islands nearby.

North Korea fired dozens of rounds of artillery in three separate barrages that began in midafternoon, while South Korea returned fire with about 80 rounds, South Korea’s Joint Chiefs of Staff said. Naval operations had been reinforced in the area, the military said early Wednesday, declining to elaborate.

Columns of thick black smoke rose from homes on the island, video from YTN cable TV showed. Screams and shouts filled the air as shells rained down on the island just south of the disputed sea border.

Island residents fled to some 20 shelters on the island and sporadic shelling ended after about an hour, according to the military.

A North Korean statement accused Seoul of starting the skirmish with its “reckless military provocation as firing dozens of shells inside the territorial waters of the” North.

The supreme military command in Pyongyang threatened more strikes if the South crossed their maritime border by “even 0.001 millimeter,” according to the North's official Korean Central News Agency.

Officials in Seoul called North Korea’s bombardments “inhumane atrocities” that violated the 1953 armistice. The two sides technically remain at war because a peace treaty was never signed, and nearly 2 million troops — including tens of thousands from the US — are positioned on both sides of the world’s most heavily militarized border. - AP