SEOUL North Korea said on Friday it was scrapping all accords with South Korea, a move the South's prime minister said could be timed to coincide with Barack Obama taking over as president.
The U.S. State Department described the North Korean comments as "distinctly not helpful" but said Washington would keep pursuing a 2005 multilateral deal under which Pyongyang agreed to abandon its nuclear programs.
Analysts said the latest rise in tension increased the chances of a military clash on the strongly defended border that has divided the two Koreas for more than half a century.
"There is neither way to improve (relations) nor hope to bring them on track," North Korea's KCNA news agency quoted the Committee for the Peaceful Reunification of Korea as saying.
"The confrontation between the north and the south in the political and military fields has been put to such extremes that the inter-Korean relations have reached the brink of a war."
KCNA also criticized South Korean President Lee Myung-bak over the appointment of a new minister in charge of relations on the peninsula, saying he was an architect of the government's "undisguised policy for confrontation with the DPRK (North Korea)."
The North in recent months has repeatedly warned of war and threatened to destroy the conservative government in Seoul that has ended a decade of free-flowing aid to Pyongyang after taking office a year ago.
South Korea's presidential Blue House stuck to its policy of largely ignoring the rhetoric flying across one of the world's most heavily armed borders, where more than 1 million troops face off.
"Our position is there is no need to react sensitively or get happy or sad over every single statement issued with some political motive (by the North)," a presidential official said.
The canceled agreements do not include the armistice at the end of the 1950-53 Korean War, signed by the United States, North Korea and China, but not the South. Technically, the war is not over because there is still no peace accord.
Speaking to Reuters on the sidelines of the World Economic Forum in the Swiss resort of Davos, South Korean Prime Minister Han Seung-soo said he hoped the North would embrace dialogue.
"We hope that instead of threats of this kind, North Korea would come out to talk to us on matters of mutual concern and interest," he said.
Asked whether the timing was tied to Obama's presidency, he said: "I don't know what is behind their thinking, but I am sure that the inauguration of the Obama administration must have had some impact on the thinking of North Korea on global issues, as well as the issue of the Korean peninsula."
U.S. State Department spokesman Robert Wood said the Obama administration was still reviewing its policy toward Pyongyang but saw value in the six-party talks that produced the 2005 denuclearization deal.
"North Korea is a priority for us," he told reporters.
Reaction in financial markets was sanguine.
"Market participants are sick and tired of the North's rah rah," said Y.S. Rhoo, an analyst at Hyundai Securities. "Investors remain pretty much unmoved now."
Major ratings agencies said they saw no reason to adjust their view on South Korea following the threats.
Some government officials say privately they worry that a sharp escalation in tension could add pressure to the South Korean economy just as the global downturn drags it toward recession.
Some analysts say the saber-rattling is more aimed at jolting newly inaugurated Obama into taking notice of Pyongyang which has for years used the threat of nuclear weapons to extract concessions from Washington -- in particular diplomatic relations and an end to its global isolation.
North Korea had hinted in a New Year message it was willing to work with Obama, who has suggested he is open to talks.
International talks to end the North's nuclear program have been stuck and Pyongyang has in the past gone beyond rhetoric to make a point. It exploded its first nuclear device in 2006 when it appeared to be increasingly isolated by Washington.
The latest move follows comments by a U.S. national security official that the secretive state's leader, Kim Jong-il, appeared to have rebounded politically from his recent health scare and is making major decisions.
Masao Okonogi, a Korea expert at Keio University in Tokyo, said the North hoped that by cutting ties with the South and Japan, it could more quickly push itself onto Obama's agenda.
"North Korea is just sending a message to the United States," Okonogi said. "If relations with the United States break down completely, there might be the possibility of military tension. But for now they want the United States to talk to them and any military action will just worsen the situation. It's just words for now."
Korea University professor Yoo Ho-yeol said the latest challenge had three aims: to put pressure on the South's President Lee to soften his policy, scare the United States and drum up political support at home.
"The North probably believes that this type of thing is the most effective way of getting the upper hand with the U.S. ahead of negotiations by raising tension," Yoo said.
In recent months, the North has all but closed the few border links with the South that were open, though a lucrative industrial park operated by Seoul just inside its border has remained open.
But Pyongyang may be exhausting its rhetorical options.
"What is worrying is that the possibility of a military clash is rising," Yoo said, pointing to the chances of broader confrontation than naval skirmishes in 1999 and 2002.
(Additional reporting by Jack Kim, Yoo Choonsik, Jon Herskovitz and Park Jung-youn in Seoul, Chisa Fujioka in Tokyo, Randall Mikkelsen and Arshad Mohammed in Washington and Jason Subler in Davos; Editing by John O'Callaghan)