The White House says it strongly condemns the attack, and other governments are calling for calm. North Korea said it will continue to launch strikes against South Korea if it violates their disputed sea border.
Thick, black smoke was seen rising from burning homes on a South Korean island. There are reports of injuries to both civilians and soldiers.
South Korea says it has returned fire. The north says it didn't fire first.
Analysts say this is one of the most serious clashes since the Korean War ended without a peace treaty in 1953. There have been occasional cross-border clashes since, but this one comes at a time of rising regional tension.
On Saturday North Korea showed off what it claimed was a new uranium facility, possibly giving it a nuclear weapon.