
The US secretary of state says her country is working hard to avoid an escalation after a report blamed North Korea for the sinking of a South Korean warship.
After talks in China, Hillary Clinton urged countries in the region to contain "the highly precarious situation created by North Korea".
Earlier, South Korean President Lee Myung-bak froze trade with Pyongyang, vowing to punish those who carried out the attack, which killed 46 sailors.
North Korea says it will retaliate.
The country's main newspaper called the investigation an "intolerable, grave provocation".
President Lee addressed the nation on television to announce Seoul would no longer tolerate "any provocative act by the North and will maintain a principle of proactive deterrence".
The US administration endorsed the move.
"US support for South Korea's defence is unequivocal, and the president has directed his military commanders to co-ordinate closely with their Republic of Korea counterparts to ensure readiness and to deter future aggression," a White House statement said.
South Korea says it will refer the North to the UN Security Council in response to the sinking of the Cheonan in March.
China - North Korea's closest trading partner and a permanent member of the Security Council - has urged "calm and restraint". Japan said it was contemplating its own sanctions on Pyongyang.
The North depends on South Korea and China for up to 80% of its trade and 35% of its GDP. In 2009, inter-Korean trade stood at $1.68bn (£1.11bn) - 13% of the North's GDP.
Resolute?
The measures announced by South Korea included:
* Stopping inter-Korean trade
* Banning North Korean ships from using South Korean waterways or shortcuts
* Resuming "psychological warfare"
* Referring the case to the UN
The BBC's John Sudworth in Seoul says the measures are about as tough a response as the South could take, short of military action.
But South Korean Unification Minister Hyun In-taek said Seoul would still maintain the joint economic project in Kaesong, even though it would "respond with resolute measures" to possible attempts by the North to undermine the safety of its workers.
The measures came less than a week after experts from the US, the UK, Australia and Sweden said in a report that a torpedo had hit the Cheonan.
They reported that parts of the torpedo retrieved from the sea floor had lettering that matched a North Korean design.
North Korea denies any involvement in the sinking, calling the investigation results a "fabrication" and threatening war if sanctions are imposed.
The South's new measures included resuming "psychological warfare" against North Korea, which was stopped in 2004. The resumption prompted an angry response from Pyongyang.
"If [South Korea] sets up new tools for psychological warfare such as loudspeakers and leaves slogans for psychological warfare intact, ignoring our demands, we will directly aim and open fire to destroy them," a statement by the military said on Monday.
"More powerful physical strikes will be taken to eradicate the root of provocation if [South Korea] challenges to our fair response," said a commander, according to official news agency KCNA.
Last week, we have learnt the terrible conclusion of the international inquiry on the Cheonan sinking : there is no more doubts, it was caused by a North Korea torpedo. Therefore, the tension in the region is at its highest point. South Korea has stopped to trade with North-Korea and reestablished psychological warfare(which was stopped in 2004). The situation is really precarious and so far was the idea of a third world war, we now have the impression that it is not only a bad dream.
South Korea have received the support from the western countries but China is still hesitating.And, China's opinion is crucial since it is a permanent member of the United Nations. No sanction could be decided by the UN without China's consent. The United States is now trying to both convince China and maintain peace int he region. The only thing China's government has said is that they have "doubts" about the conclusion of the inquiry. Will China support a whim of North Korea and avoid sanctions on that country? In this case, what will happen if South Korea sink a North Korean warship in its water zone? That means North Korea will attack, and then will SOuth Korea and the United States accept that?
In my opinion, it is not so sure that China will accept to support North Korea. North Korea is just a satellite country and China is in a strong position. I think China will negociate very hard with the US to take advantage of the situation. Besides this geopolitical toughts, we cannot forget the human tragedy in North Korea. Indeed, North Korea rely on the South Korean for trading and the embargo could worsen the critical economic situation and brings more starving.
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