North Korea threatened to scrap all military assurance agreements with South Korea yesterday and warned of an immediate attack should Seoul intrude on the disputed maritime border, further raising tensions on the peninsula.

Pyongyang's threat to abandon the agreements – designed to prevent accidental armed clashes and protect the safety of South Korean workers in a Northern factory enclave – came as Seoul elevated its alert level and began anti-submarine exercises off the west coast of the peninsula.

The threats mark the most serious deterioration in relations between the neighbours, who are still officially at war, in more than a decade and have rattled international markets. They stabilised yesterday and financial regulators in Seoul said overseas investors had overreacted to the sinking of the Cheonan, a South Korean warship, in March. The Korean won rose to Won1,224 per dollar for the first time in six sessions and the benchmark Kospi index closed up 1.6 per cent.