Seoul's defence ministry said two shells fell about 150 metres (yards) off a South Korean Navy corvette on patrol south of the tense western sea border yesterday.
The ship was not damaged and responded by firing five rounds into waters near a North Korean military vessel.
"The verified fact is that the puppet navy vessel, which intruded deeply into our waters under the pretence of controlling Chinese fishing boats, fired recklessly and lied that we had fired first. This is a sheer fabrication", North Korea's military Western Front Command said in a statement.
It then vowed to turn the tense sea border area into "tombs" for the South's military.
The incident came after a South Korean naval ship fired warning shots on Tuesday after three North Korean patrol boats crossed the sea boundary.
North Korea then threatened Wednesday to launch an attack on South Korean warships without warning at the slightest hint of any provocative act, claiming the North Korean patrol boats were controlling illegal Chinese fishing boats north of the disputed sea border.
It was the scene of brief but bloody naval clashes in 1999, 2002 and 2009.
In March the North fired hundreds of shells in a live exercise near the sea boundary. About 100 shells dropped into South Korean territorial waters, and the South responded with volleys of shells into North Korean waters.
Cross-border tensions have been high for months and both sides have upped the ante in their verbal exchanges over crashed surveillance drones recently recovered on the South Korean side of the border.