SEOUL (Reuters) - North Korea threatened a nuclear "sacred war" on Thursday and South Korea vowed a "merciless counterattack" if it was attacked again as both sides raised the rhetoric on a day of more military exercises in the South.
South Korea's land and sea exercises prompted North Korea, which has threatened to reduce the South to ashes on many occasions, to denounce its richer neighbour as a warmonger.
"To counter the enemy's intentional drive to push the situation to the brink of war, our revolutionary forces are making preparations to begin a sacred war at any moment necessary based on nuclear deterrent," North Korea's KCNA news agency quoted Minister of Armed Forces Kim Yong-chun as saying.
State Department spokesman P.J. Crowley said "we need constructive actions, not heated rhetoric" from Pyongyang.
"The last thing the region needs from North Korea is more threatening rhetoric," he said in Washington.
North Korea has wielded its nuclear capability threat before but analysts say it has no way to launch a nuclear device.
Tension reached a peak last month when North Korea shelled a southern island, Yeonpyeong, killing four people, in response to a South Korean live-fire drill in what the North said were its waters.
The North has since made a conciliatory gesture, offering to re-admit U.N. nuclear inspectors worried about its nuclear weapons program.
"We've seen North Korea flip-flop from threatening the South with nuclear war before the military exercises, then a day later ignore that the exercises took place, launch a peace initiative, and now, just days later, once again threaten with nuclear war," said Mark Hibbs of the Carnegie Endowment for International Peace.
"The flip-flopping is part of North Korea's tactic to keep everyone guessing and off balance."
South Korean President Lee Myung-bak said on a tour of a forward army base overlooking North Korea that the South would not relax its readiness to counter any further aggression.
"We had believed patience would ensure peace on this land, but that was not the case," Lee, criticized for a perceived weak earlier response to North Korean attacks, told troops.
South Korea held a big land drill in the Pocheon region between Seoul and the heavily armed demilitarized zone (DMZ) separating the two Koreas. It also continued naval live-fire exercises 100 km (60 miles) south of the maritime border.
The drill involved a larger scale of firepower and personnel than usual for an exercise at the army training ground, a further indication that Lee wants to show the public his government can stand up to the North.
A large contingent of mechanized units operating tanks, three dozen self-propelled artillery, fighter jets and multiple rocket launchers took part in the live-fire drill just miles from the border. It lasted just less than an hour.
A British Foreign Office spokesman defended South Korea's decision to hold the exercises.
"South Korea has every right to conduct defensive military exercises in its territory," he said. "We urge North Korea to cease its aggressive rhetoric and refrain from provocative actions."
Lee has replaced his top defence officials with more hawkish military men, a response to criticism of his response to hostile acts, including an attack on a ship in March blamed on the North and the shelling of Yeonpyeong.
"We are facing a crisis because of North Korea, so I came to see this air and ground operation. I want to feel and see the level of South Korea's armed forces," said Kim Tae-dong, a 70-year-old Internet businessman, in Pocheon.
"Another North Korean provocation will happen. We should prepare our military perfectly for that."
Seoul's financial markets closed flat before the KCNA threats. Pyongyang's remarks have failed in the past to have a lasting market effect and South Korean credit-default swaps, a measure of credit risk, were unchanged.
But the recent tensions have spooked global markets and now figure in research notes from major banks such as Bank of New York Mellon, Royal Bank of Canada and Sweden's SEB.
Alastair Newton, a former British diplomat who is now a political analyst for Japanese bank Nomura, said the North's rhetoric was "the sort of thing we've heard before."
"But there's no doubt we are ... in the most dangerous situation on the Korean peninsula in decades."
Analysts say the North is unlikely to launch a further attack against the South, in the near-term at least.
For now, the North is likely to wait and see if its latest actions, including the offer to readmit international nuclear inspectors, yield results such as a return to international talks on its nuclear program or economic aid.
China, the impoverished North's only major ally, has urged dialogue to resolve the crisis and has been reluctant to lay blame, frustrating Washington and its allies who want Beijing to do more to rein in Pyongyang.
President Barack Obama is expected to press this point when Chinese President Hu Jintao visits the United States on January 19.
Chinese Foreign Ministry spokeswoman Jiang Yu, when asked about the South Korean drills, repeated China's call for a resumption of the so-called six-party talks.
"The current situation on the Korean peninsula remains highly complex," she told a regular news briefing. "We urge parties concerned to exercise calm and restraint."
Additional reporting by Yoo Choonsik and Danbee Moon in Seoul, Brian Love in Paris, Peter Apps in London, Fredrik Dahl in Vienna and Andrew Quinn in Washington; Writing by Nick Macfie and Sonya Hepinstall; Editing by Eric Beech