North Korea has launched an artillery barrage on a South Korean island in one of the most serious clashes since the end of the Korean War nearly 60 years ago.

Two South Korean soldiers have died, while more than a dozen others have been wounded and a number of houses caught fire.

Media reports say about 50 North Korean artillery shells slammed into the island of Yeonpyeong, about 3km south of the Yellow Sea border and 120km west of Seoul.

Residents were forced to flee as the shells hit homes and set them ablaze.

South Korea's military has confirmed two marines were killed and at least 14 others were wounded in the barrage, four seriously.

Defence minister Kim Tae-Young says the South fired 80 shots in response during an exchange that lasted for about an hour.

State media in North Korea says the South fired first.

Seoul has raised its alert to the highest level and the security cabinet has met in an underground bunker.

South Korean F-16 fighter planes have also been scrambled to the island.

The Yellow Sea border has been the site of several exchanges of fire, with naval clashes claiming a number of lives.

Today's exchange was the most serious between the two Koreas in years and comes days after the North announced it had a new uranium enrichment facility.

South Korean president Lee Myung-bak says he is trying to prevent the exchange from escalating into a greater conflict, Yonhap news agency reports.

YTN reported Seoul had warned of a stronger response if the North continued with provocations.

Yeonpyeong resident Lee Jong-Sik told YTN television that at least 10 houses were burning.

"I can't see clearly for the smoke. The hillsides are also on fire," he said.

"We were told by loudspeakers to flee our homes."

TV footage showed huge plumes of smoke rising from the island.

Residents have been evacuated to safe areas and the military and police are checking the number of casualties, YTN said.

"I was at home but suddenly heard a thunderous sound outside. When I walked out, the whole village was on fire," a villager was quoted by Yonhap as saying.

"I'm at the evacuation site with other villagers and I am scared to death."

The incident comes amid high cross-border tensions over the North's nuclear program and the deadly sinking of a South Korean warship near the border in March.

International reaction

Australia's Foreign Minister, Kevin Rudd, says the situation in Korea is deeply concerning.

"I'm confident that president Lee Myung-bak will handle this appropriately," Mr Rudd said.

"I'm less confident the North Koreans are capable of handling these things competently, but we in Australia will stand in support of the Republic of Korea's response to this provocative act.

"This is bad for the stability and security of the region and this region is our region, Australia's as well."

The White House has condemned the artillery attack and demanded the action cease.

"The United States strongly condemns this attack and calls on North Korea to halt its belligerent action," the White House said, adding that it was in close and continuing contact with South Korea over the situation.

"The US is firmly committed to the defence of our ally, the Republic of Korea, and to the maintenance of regional peace and stability."

Japanese prime minister Naoto Kan has ordered his ministers to prepare for any eventuality.

China has also expressed concern over the attack, while a senior Russian foreign ministry official says the artillery attack is unacceptable and called on both sides to show restraint to prevent a wider conflict.

North Korea says the South initiated the firing of shells, prompting it to take military action.

"Despite our repeated warnings, South Korea fired dozens of shells... and we've taken strong military action immediately," the North's official KCNA news agency said in a brief statement.

It did not elaborate whether North Korea had suffered any damage from the exchange.

- ABC/wires