North Korea fired a shell at a South Korean military unit on August 20, prompting South Korea to retaliate with several artillery rounds, the South’s defense ministry said.
South Korea’s National Security Council is due to hold an emergency session.
The western sea border has long been a flashpoint between the two Koreas.
North Korea fired a projectile towards Yeoncheon, a town north-west of Seoul, at 15:52 local time, the defense ministry said.
Reports suggest the target could have been a loudspeaker broadcasting anti-Pyongyang messages.
South Korea then fired “dozens of rounds of 155mm shells” towards where they thought the rocket was launched from, the ministry added in a statement.
There were no immediate reports of any injuries or damage on either side.
South Korea and North Korea remain technically at war, because the 1950-1953 war ended in an armistice, not a peace treaty.
The two sides have exchanged cross-border fire several times in recent years.
A local official told AP news agency that about 80 residents in Yeoncheon had been evacuated, with other residents in the area also urged to take shelter.
The latest incident comes amid heightened tensions between the North and South.
Seoul has blamed the North for planting a landmine that injured two South Korea soldiers earlier this month.
Since then, the sides have begun blasting propaganda broadcasts from loudspeakers along the border – restarting a practice both had suspended back in 2004.
South Korea and the US also began annual joint military exercises on August 17 – they describe the drills as defensive, but North Korea calls them a rehearsal for invasion.
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