South Korea said Friday that all remaining staff at its joint industrial complex with North Korea should leave for their own safety, after Pyongyang shunned an offer of formal talks.
The move puts into further doubt the entire future of the Kaesong complex -- the last remaining symbol of inter-Korean cooperation and a crucial source of hard currency for the impoverished North.
South Korea on Thursday had given the North 24 hours to agree to formal negotiations on restarting operations at Kaesong, warning of "significant measures" if Pyongyang declined.
After the North's top military body rejected what it described as the "fraudulent" proposal, the South's Unification Minister Ryoo Kihl-Jae said Seoul was left with no option.
"The government has made the inevitable decision to withdraw all the remaining people for their protection," Ryoo said in a televised press briefing.
"North Korea must guarantee the safe return of our personnel and fully protect the assets of the companies with investment in Kaesong," he added.
The Korean peninsula was engulfed in a cycle of escalating tensions -- triggered by the North's nuclear test in February -- when Pyongyang decided on April 3 to block all South Korean access to Kaesong.
Six days later, Pyongyang pulled out its 53,000-strong workforce and suspended operations, angered by the South's mention of a "military" contingency plan to protect its staff at the site.
While the North has allowed all South Korean personnel to leave the complex, 175 remained as of Friday.
It was unclear how the South Korean government planned to implement its decision, given that representatives of the 123 firms based in Kaesong have vowed to remain and protect their investment whatever steps Seoul announced.
Established in 2004, Kaesong lies 10 kilometres (six miles) inside North Korea.
The project was born out of the "Sunshine Policy" of inter-Korean conciliation initiated in the late 1990s by then South Korean president Kim Dae-Jung.
It operates as a collaborative economic development zone that hosts South Korean companies attracted by its source of cheap, educated, skilled labour, with turnover in 2012 reported at $469.5 million.
It provides North Korea with a rare hard currency source through taxes and revenues and from its cut of worker wages.
Ryoo's statement came hours after the North's National Defence Commission (NDC) dismissed the offer of negotiations and insisted that any decisive move on Kaesong would come from its side.
"If the South Korean puppet regime keeps aggravating the situation, it will be (North Korea), not South Korea, that will be forced to take the final decisive and crucial measure first," the statement said.
Insisting that South Korean government officials were responsible for the standoff over Kaesong, the NDC said resorting to "ultimatum-like announcements... would only advance their final destruction".
The NDC statement openly challenged Seoul to go ahead with any pullout, and said it would take all "humanitarian measures" to ensure the safety of any South Koreans who opted to leave.
Even given the soaring tensions, the North's decision to suspend operations at Kaesong nearly three weeks ago had been unexpected, as neither side has allowed previous crises to significantly affect the complex.
Permanent closure would wipe out the last remaining point of contact and cooperation between North and South, which remain technically at war after the 1950-53 Korean War was concluded with a ceasefire rather than a peace treaty.
Kaesong "is now on the verge of collapse", Friday's NDC statement said. "This is entirely attributable to the reckless war hysteria of the South Korean puppet regime."
South Korean President Park Geun-Hye chaired a meeting Friday afternoon with top security and foreign affairs officials to discuss the impasse over the complex.
Park, who was elected last year on a campaign promise of greater engagement with Pyongyang, has pushed the need for dialogue over Kaesong several times in recent weeks.