"Some of the shells fired by North Korea dropped in our area and our side responded with fire," a spokesman for the South Korean Joint Chiefs of Staff (JCS) said.
There was no indication that either side was firing at any particular target.
Officials on the South Korean border islands of Yeonpyeong and Baengnyeong said residents were being evacuated to shelters as a precaution.
The North Korean live fire exercise began at 0845 IST and the South began responding with its own volley of artillery shells within 30 minutes.
North Korea regularly conducts live-fire drills but, in an unusual move, it had notified the South of today's exercise in advance.
The JCS had immediately warned it would respond in the event of any shells falling on its side of the border.
The Yellow Sea boundary is an extremely sensitive region that has been the scene of brief but bloody clashes in the past.
In November 2010, North Korea shelled Yeonpyeong island, killing four people and triggering concerns of a full-scale conflict.
"The aim is to threaten us and rack up tension on the Yellow Sea border and the overall Korean peninsula," South Korean Defence Ministry spokesman Wi Yong-Seop told reporters before the North Korean drill began.
The exchange of fire came a day after North Korea threatened to carry out a "new form" of nuclear test - seen as a possible reference to efforts to build a nuclear warhead small enough to fit on a ballistic missile.
Pyongyang has carried out a series of rocket and short-range missile launches in recent weeks, in a pointed protest at ongoing annual South Korea-US military exercises.
On Wednesday it upped the ante by test-firing two mid-range ballistic missiles capable of striking Japan.
It was the first medium-range missile launch since 2009 and coincided with a trilateral summit attended by the South, the United States and Japan that focused on presenting a united front to the dangers posed by Pyongyang's nuclear ambitions.
North Korea has conducted three nuclear tests, the most recent - and most powerful - in February last year.
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