In this file photo taken on Sept. 9, 2018, Korean People's Army tanks take part in a military parade on Kim Il Sung square in Pyongyang. North Korea's army is "fully ready" to take action against the South, state media said on June 16, 2020, in the latest verbal sabre-rattling from Pyongyang, days after its leader's sister threatened military moves against Seoul. AFP

North Korea blew up an office set up to foster better ties with South Korea in its border town of Kaesong on Tuesday after it threatened to take action if North Korean defectors went ahead with a campaign to send propaganda leaflets into the North.

North Korea's KCNA state news said the liaison office, which had been closed since January over fears of the novel coronavirus, was "tragically ruined with a terrific explosion".

South Korea also said the office had been blown up. Its media reported that an explosion was heard and smoke could be seen rising over Kaesong.

The office, when it was operating, served as an embassy for both of the old rivals and its destruction represents a major set-back for efforts by South Korea's President Moon Jae-in to coax the North into cooperation.

Tension has been rising over recent days with North Korea threatening to cut ties with South Korea and retaliate over the propaganda leaflets, which carry messages critical of North Korean leader Kim Jong Un, including on human rights.

KCNA said the office was blown up to force "human scum and those, who have sheltered the scum, to pay dearly for their crimes". North Korea refers to defectors as "human scum".

A South Korean military source told Reuters that there had been signs North Korea was going ahead with the demolition earlier in the day, and South Korean military officials watched live surveillance imagery as the building was blown up.

South Korea's won weakened by about 0.7% against the dollar in offshore non-deliverable forward trade after the reports, which came soon after the onshore spot trade finished.

On Saturday, North Korean state media reported that Kim Yo Jong, the sister of the North Korean leader, who serves as a senior official of the ruling Workers' Party, had ordered the department in charge of inter-Korean affairs to "decisively carry out the next action".

"Before long, a tragic scene of the useless north-south joint liaison office completely collapsed would be seen," she was reported as saying.

The first diplomatic mission of its kind, the inter-Korean liaison office was established in 2018 as part of a series of projects aimed at reducing tensions between the two Koreas.