“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) told Agence France-Presse.
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 12:15 pm (0315 GMT) and the South began responding with its own volley of artillery shells within 30 minutes.
“For the moment, both sides are firing into the sea,” the JCS spokesman said.
North Korea regularly conducts live-fire drills but, in an unusual move, it had notified the South of Monday’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 fact that they sent a message to us indicates their hostile intention,” Wi said.
‘New form’ of nuclear test
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.