South Korea is to suspend operations at a jointly run industrial park in North Korea following the North’s recent rocket launch and nuclear test.
Seoul said all operations at the complex would halt, to stop the North using its investment “to fund its nuclear and missile development”.
Kaesong is the last point of co-operation between the two Koreas and a key source of revenue for Pyongyang.
The US warns the North could soon have enough plutonium for nuclear weapons.
South Korea, the US, Japan and others see Sunday’s rocket launch – ostensibly to put a satellite into space – as cover for a banned test of missile technology.
Tensions have risen over the past month since North Korea carried out a fourth nuclear test in early January.
“All our support and efforts… were taken advantage of by the North to develop its nuclear weapons and missile programmes,” the South’s Unification Minister Hong Yong-pyo told reporters.
The announcement came amid reports that the North’s military chief, Ri Yong-gil, had been executed on corruption charges.
South Korea’s state news agency Yonhap quoted unnamed sources saying the general, who was appointed in 2013, had been deemed guilty of corruption and pursuing personal gains.
There was no immediate confirmation of the report.