North Korea has said it is cancelling all contracts with South Korea at a joint industrial complex, raising further tensions on the peninsula, BBC reported.
South Korea must accept the new rules unconditionally or leave the Kaesong plant, said the North in a statement.
Seoul called the ultimatum unacceptable and said the North was "irresponsible".
The move came just hours after Seoul requested fresh talks over the Kaesong industrial plant, which is a big source of income for the sanction-hit North.
Some 38,000 North Koreans are employed at more than 100 South Korean firms operating at the border complex.
Pyongyang says it wants to draw up its own regulations on wages and taxes for its workers, and renegotiate land lease terms.
In April, rare economic talks about the plant ended without agreement after just 22 minutes.
The latest announcement by Pyongyang drew an angry response from the South.
"This is a measure that fundamentally threatens the stability of the Kaesong complex, and it is not acceptable at all," said a Unification Ministry spokesman.
"It is irresponsible for the North to say that [firms] should leave unless they unconditionally accept its measure."
The move also casts doubt on the release of a South Korean worker at the complex who was arrested in March for allegedly criticising the North's government.
Kaesong opened in 2005 as a symbol of reconciliation between two countries.
Tensions have been high on the Korean peninsula since the North launched a rocket on 5 April.
The UN Security Council criticised the launch, and in response North Korea said it was leaving six-party talks on nuclear disarmament, expelling international monitors and restarting its nuclear facility at Yongbyon.
North Korea is particularly angry at the South, after it announced its intention to join a US-led Proliferation Security Initiative, to prevent the sea transit of weapons of mass destruction.
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