An official at the Joint Chiefs of Staff in Seoul said the exchange of fire at the heavily militarized border began when North Korean troops fired at a South Korean guard post in the Demilitarized Zone.
There were no South Korean injuries and it was unclear whether it was an accident or an intentional provocation, the official said. He asked not to be identified because he was not authorized to speak to the media.
The guard post is 73 miles (118 kilometers) northeast of Seoul.
The firing of the 14.5-mm rounds came hours after North Korea criticized the South for rejecting a proposal to hold military talks and vowed to retaliate.
Shooting incidents are infrequent at the border. The last such incident was in 2007 when South Korea said North Korean soldiers opened fire and the South shot back. No South Korean soldiers were hurt and it was unclear if anyone was injured in the North.
Despite Friday's exchange of fire, previously arranged reunions of hundreds of families separated by the Korean War will go ahead Saturday in the North as scheduled, South Korean Unification Ministry spokesman Chun Hae-sung said.
The ministry handles South Korea's relations with the North.
The spike in tensions Friday came two weeks ahead of a global economic summit in Seoul, which is just 31 miles (51 kilometers) from the border.
Last week, the North's military proposed holding talks with South Korea over anti-North Korean leafletting by South Korean activists and other South Korean propaganda activities, the North's military said in a statement Friday carried by the country's official Korean Central News Agency.
It warned Friday of "merciless physical retaliation" for not accepting the talks, and said South Korea will realize "what catastrophic impact their rejection of dialogue will have on the North-South relations."
The proposed talks did not take place as the two Koreas remain at odds over the sinking of a South Korean warship in March, a South Korean Defense Ministry official said. He also spoke on condition of anonymity, citing internal policy.
In May, a multinational investigation led by Seoul concluded that a torpedo fired by a North Korean submarine sank the 1,200-ton Cheonan warship. North Korea has denied involvement in the sinking, which killed 46 South Korean sailors.
The sinking heightened tensions between the rival Koreas, which remain technically at war because their 1950-53 war ended with a cease-fire, not a peace treaty.
The North warned during military talks with South Korea in late September that it might fire artillery at sites in the South where civilian activists use balloons to launch leaflets condemning North Korean leader Kim Jong Il across the border.
North Korean defectors and South Korean activists regularly float leaflets in a campaign to urge North Koreans to rise up against Kim. The North views the leaflets as part of psychological warfare aimed at toppling its regime.