The move represented North Korea’s most serious provocation in years and follows an escalating series of threats against South Korean President Moon Jae-in’s government. The state-run Korean Central News Agency said in a statement that the office — the most concrete achievement from a series of summits between the two Koreas in 2018 was — was “tragically ruined with a terrific explosion.”

South Korea’s Unification Ministry called the demolition of a 18 billion won ($15 million) facility that served as a de facto embassy for the two countries a “senseless act” that had “destroyed the hopes of those who wished for peace on the Korean Peninsula.” The country’s National Security Council warned North Korea of a strong response if it took further actions, but gave no indication of imminent retaliation.

The destruction of the building comes about a week after Kim Jong Un’s regime abandoned its operations at the South Korea-funded facility, which allowed officials from both sides to communicate around the clock. North Korea has been seeking to raise pressure on Moon in frustration over Seoul’s continued support for the U.S.-led sanctions campaign that’s hobbled its economy.

While it wasn’t immediately clear how the allies would react, Kim’s target seemed chosen to embarrass Moon without provoking a military response from South Korea or U.S. President Donald Trump. Moon has spent much of his presidency seeking better ties with Pyongyang, sometimes putting himself at odds with more hawkish voices in the Trump administration.

“We can expect Pyongyang will continue with similar military acts, but not enough that would force Seoul to retaliate in kind with force,” said Duyeon Kim, a senior adviser for Northeast Asia and Nuclear Policy at the International Crisis Group. “We should remember that the liaison office was essentially already dead, so, if there’s a real problem, then it’s for South Korean taxpayers.”

The initial U.S. response was muted, with a senior administration official saying the American government was aware of the North Korean move and that the U.S. was in close coordination with its South Korean allies. 

Onshore markets had finished trading when reports of the attack first emerged at around 3:30 p.m. local time, and Kospi 200 futures ended the session up 5.6% after rallying almost 7%. Foreign investors pulled a net 727 billion won from the contracts.

Shares of Top tech firms Samsung Electronics Co. and SK Hynix Inc. dropped more than 1% in after-hours trading, according to data from brokerage Mirae Asset Daewoo. One-month dollar-won non-deliverable forwards rose 0.3% to 1,211.41, suggesting that the South Korean currency will weaken when trading resumes Wednesday.

The incident was among the most serious provocations since 2010, when North Korea was suspected of torpedoing a South Korean warship, killing 46 sailors, and a few months later shelling a South Korean island, killing two soldiers and two civilians. The attacks threatened to spill into open fighting, but tensions were defused amid concerns about the devastation from another war.

Trade between the two Koreas has dropped to virtually zero from $2.7 billion in 2015, or about 10% of North Korea’s economy. The regime took a further hit this year when it sealed off its borders in January at the start of the Covid-19 pandemic, which slammed the brakes on other trade with countries like China.

Chinese Foreign Ministry spokesman Zhao Lijian told a daily briefing soon after the incident that the country hoped for peace on the Korean Peninsula, without mentioning the liaison office. China is North Korea’s main political backer and trading partner, giving it a key role in implementing international sanctions against North Korea.

The liaison office, opened two years ago, was part of moves to reduce threats along the border as Kim also engaged Trump in talks about his nuclear weapons program. The office allowed for constant communication between the two sides for the first time since the start of the 1950-53 Korean War.

Earlier Tuesday, North Korea said it was reviewing plans to send troops into some areas of the Demilitarized Zone, without citing specific parts of the heavily fortified border area. The statement appeared to be referring to a region near the office on the western side of the peninsula and a closed joint resort in the east around Mount Kumgang, the Yonhap News Agency reported.

Moon has recently pushed to restore some of the frozen economic ties with North Korea and repeatedly called for North Korea to hold talks. Pyongyang has ignored his calls for dialogue and chastised him for being meddlesome in his attempts to serve as a bridge between Kim Jong Un and Trump.

Cheong Seong-chang, director of the Centre for North Korean Studies at the Sejong Institute, said the latest action illustrated North Korea’s “strong will” to “completely shut off” relations with the South.

“North Korea is working toward re-militarization of the Kaesong industrial complex,” Cheong said. “And blowing up the liaison office in the complex would just be the first step on their road map.”

North Korea continued to lay the blame on anti-Kim leaflets flown across the border by South Korean-based activists, saying the country was compelled to “force human scum, and those who have sheltered the scum, to pay dearly for their crimes.” The regime went ahead with the move, even though Moon’s government last week revoked the licenses of two groups involved and urged a criminal investigation into their leaders.

Millions of leaflets have flown across the border for more than a decade bearing messages critical of North Korean leaders. The latest came as Kim Jong Un made fewer public appearances over the past several weeks than normal, leading to global speculation about his health.

Over the years, North Korea has often threatened military action — saying it would turn Seoul into a “sea of fire” and sink the Japanese archipelago — but has taken few steps that could escalate into open conflict with the U.S. and its allies.

“It often bluffs, and we have seen lots of that before,” said Zhang Baohui, a professor of political science and director of the Centre for Asian Pacific Studies at Lingnan University in Hong Kong. “However, when it comes to concrete actions North Korea has been prudent as it understands the huge costs associated with imprudent actions.”(Updates with Trump administration acknowledgement in seventh paragraph.)

–With assistance from Jing Li, Chester Yung, Tan Hwee Ann, Jihye Lee, Shinhye Kang and Josh Wingrove.