Kaesong is a jointly-run industrial park in North Korea, the last points of co-operation between the two Koreas and a key source of revenue for Pyongyang.
South Korea said all operations at the complex would halt, to stop the North using its investment “to fund its nuclear and missile development”.
It came as Japan imposed new sanctions against North Korea following the launch.
They include a ban on North Korean vessels coming into port in Japan and on vessels from other countries that have visited the state,
The US warned on February 9 that North Korea could soon have enough plutonium for nuclear weapons.
South Korea, the US, Japan and others see February 7 rocket launch – ostensibly to put a satellite into space – as cover for a banned test of missile technology.
Tensions have risen over the past month since North Korea carried out a fourth nuclear test in early January.
“All our support and efforts… were taken advantage of by the North to develop its nuclear weapons and missile programs,” South Korea’s Unification Minister Hong Yong-pyo told reporters.
The announcement came amid reports that North Korea’s military chief, Ri Yong-gil, had been executed on corruption charges.
South Korea’s state news agency Yonhap quoted unnamed sources saying the general, who was appointed in 2013, had been deemed guilty of corruption and pursuing personal gains.
There was no confirmation of the report.
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