A South Korean warship has exchanged fire with a North Korean naval vessel, reports from both countries say.
Officials in Seoul say the South Korean vessel opened fire when the Northern ship crossed a disputed sea border. The North Korean vessel then fired back.
North Korea insists its ship did not cross the border, and has demanded an apology, according to news agency KCNA.
The White House warned North Korea against any further action that could be seen as an "escalation".
The two navies have engaged in deadly exchanges twice along their western sea border in the past decade.
The incident comes days before US President Barack Obama visits Asia, with North Korea seeking direct talks on its nuclear programme.
In the North's version of events, a patrol boat was on a mission to confirm "an unidentified object" on the North's side of the border, and while it was sailing back, South Korean ships chased it and opened fire in a "grave armed provocation".
John Sudworth, BBC News, Seoul
Any military clash between North and South Korea will be regarded by governments in this region as extremely serious.
There are however a number of precedents, exchanges of fire between the two navies that have led to casualties on both sides but no further military escalation.
The South, though, has accused the North of deliberately provoking these kinds of naval clashes to raise tension and increase its leverage in negotiations.
Multilateral disarmament talks have broken down, and the North is seeking bilateral talks with the United States, a forum analysts say it sees as more likely to win it the concessions it seeks.
The North Korean vessel "lost no time to deal a prompt retaliatory blow at the provokers", KCNA said.
"Much flurried by this, the group of warships of the South Korean forces hastily took to flight to the waters of their side."
Seoul's military has also demanded an apology for the incident.
South Korean officials said none of their troops had been hurt, while the North's boat had been set ablaze before it sailed away.
In October, North Korea's navy accused South Korea of sending warships across their maritime border to stir tensions, and warned that further incursions could spark retaliations.
The communist state's navy said that on one day alone, ships had crossed the boundary 10 times.
South Korea recognises the Northern Limit Line, drawn unilaterally by the US-led United Nations Command at the end of the 1950-53 Korean War, which has never been accepted by North Korea.
The last two major deadly clashes in the disputed waters took place in 1999 and 2002 during battles that lasted less than 30-minutes.
1996: A North Korean submarine runs aground in South Korean waters
1998: South Korea captures a North Korean mini-submarine in its waters
1999: At least 17 North Korean sailors believed killed in naval fire fight
2002: Four South Korean sailors and an estimated 30 North Koreans killed in a naval battle
Both Koreas are part of the Six Party Talks process designed to end North Korea's nuclear weapons programme.
Relations between the two thawed slightly in the 1970s, and then in 1991 after both signed a basic agreement with a goal of reunification.
In October 2007 the countries' leaders pledged to seek talks to formally end the Korean War, but this year the tension heightened again and the deal stalled.
North Korea has said South Korea's decision in May to join a US-led initiative to search ships for nuclear weapons caused it to abandon the 1953 truce that had ended the war.