North Korea warned of a military response after South Korea joined an anti-proliferation exercise, and said it is no longer bound by the 1953 armistice which ended their war.

A military statement quoted by official media also said the North could no longer guarantee the safety of shipping off its west coast.

It repeated Pyongyang's position that Seoul's decision to join the US-led Proliferation Security Initiative (PSI) is tantamount to a declaration of war.

South Korea announced on Tuesday it will become a full member of the PSI initiative to curb trade in weapons of mass destruction, after the North tested a nuclear weapon the previous day.

"Any tiny hostile acts against our republic, including the stopping and searching of our peaceful vessels... will face an immediate and strong military strike in response," the statement said.

"Our military will no longer be bound by the armistice accord as the current US leadership... has drawn the puppets (South Korea) into the PSI," said the statement from the North's military representative at the border truce village of Panmunjom.

The statement said that if the armistice is no longer binding, "the Korean peninsula will go back to a state of war."

This meant North Korean troops would take "corresponding military action," the statement said without giving details.

"Those who have provoked us will face unimaginable merciless punishment."

The statement said the US "imperialists and the traitor Lee Myung-Bak's group have driven the situation on the Korean peninsula into a state of war."

Mass rally

Earlier the day, North Korea held a mass rally to celebrate its nuclear test and reportedly restarted a plutonium-producing plant, as world powers pondered how to punish the communist state for its defiance.

Unfazed by international anger at its second bomb test, Pyongyang has also test-fired six short-range missiles and reportedly intensified military exercises in regions close to South Korea.

The United Nations Security Council has unanimously condemned the North but diplomats said on Tuesday that members need some time to agree on a new resolution sanctioning it.

The US envoy to the world body, Susan Rice, said members want "a strong resolution with teeth."

Sanctions "could take very different forms" and might include "economic levers," she told CNN without elaborating.

It was unclear how far permanent Council members China and Russia would go. Both strongly criticised Monday's test but last month blocked a new resolution to punish the North for its April 5 rocket launch.

"It's clear that the Chinese are moving closer to the US position but I don't know if this means close enough," Korea analyst Scott Snyder told AFP in Washington.

The North's state media poured scorn on the sanctions drive.

"It is a ludicrous idea for the US to think that it can defeat us by sanctions. We have been living under US sanctions for decades...the US hostile policy towards us is like beating a rock with a rotten egg," said the cabinet newspaper Minju Joson.

Pyongyang residents held a mass rally on Tuesday to hail the nuclear test as a defensive measure against "vicious" US hostility, the state news agency said on Wednesday.

Senior communist party official Choe Thae-Bok said US military threats and economic sanctions prompted the test.

To shore up support

It "was a grand undertaking to protect the supreme interests of the DPRK (North Korea) and defend the dignity and sovereignty of the country and nation in face of the US imperialists' unabated threat to mount a preemptive nuclear attack and sanctions and pressure upon it," Choe was quoted as telling the gathering.

"The situation of the country is growing tenser," he said, blaming the "vicious hostile policy" by the US, Japanese and South Korean governments.

Analysts have said ailing leader Kim Jong-Il went ahead with the test to shore up support for his regime and for his succession plans, and that public rallies would confirm such a motive.

A years-long diplomatic effort to shut down the North's nuclear programme appeared to be paying off back in 2007, when Pyongyang shut down the plants at Yongbyon which produced plutonium.

But the North's policy has become noticeably harder-line since last summer when Kim, now 67, reportedly suffered a stroke.

South Korean media said on Wednesday the North has restarted its nuclear fuel reprocessing plant.

Steam was recently seen rising from a plant at Yongbyon in a sign it is being reactivated, Chosun Ilbo newspaper said.

The North is estimated to have stockpiled enough plutonium to build up to a dozen small bombs. If it reprocesses all the 8,000 spent reactor fuel rods at Yongbyon, this would yield enough for one more.

Hamburg-based expert Martin Kalinowski estimated the power of Monday's underground test at about four kilotons equivalent of TNT, with an uncertainty range from three to eight kilotons.

The October 2006 blast was estimated at less than one kiloton.

South Korea has announced it is joining a US-led anti-proliferation drive in response to the latest test. It has put its military on heightened alert.

Cross-border relations have been icy for the past year, since a conservative government came to power in Seoul and took a firmer line with Pyongyang.

A source quoted by Yonhap news agency said the North recently stepped up its combined military exercises in regions close to the border.

Leader Kim inspected a special forces drill at an eastern coastal city in mid-April and naval and air forces have intensified joint training based on a war scenario off the west coast, it quoted the source as saying.