South Korea says it has returned fire after North Korea fired around 200 artillery shells onto one of its border islands, reportedly killing one marine.
The South's military was placed on its highest non-wartime alert after the shells landed on Yeonpyeong island.
North Korea has not yet commented on the incident, in which three marines and two civilians were also injured.
Correspondents say this is one of the most serious since the Korean War ended without a peace treaty in 1953.
There have been occasional cross-border clashes since, but the latest incident comes at a time of rising regional tension.
North Korea's reclusive leader Kim Jong-il is believed to be ill and trying to engineer the succession of his youngest son. And on Saturday, North Korea showed off what it claimed was a new uranium enrichment facility - potentially giving it a second route to a nuclear weapon.
Predictably, the markets don't like what they're seeing here.
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