South Korea says it is withdrawing its remaining workers from a jointly-run industrial complex in North Korea.
The announcement came from the unification minister shortly after Pyongyang rejected an offer of talks.
North Korea blocked access to the Kaesong zone - once a symbol of inter-Korean co-operation - earlier this month and later pulled its workers out.
The move followed weeks of high tension in the wake of North Korea's third nuclear test in February.
"Because our nationals remaining in the Kaesong industrial zone are experiencing greater difficulties due to the North's unjust actions, the government has come to the unavoidable decision to bring back all remaining personnel in order to protect their safety," Unification Minister Ryoo Kihl-jae said.
"North Korea must guarantee the safe return of our personnel and fully protect the assets of the companies with investment in Kaesong," he added.
He did not give a timescale for the withdrawal. A total of 175 South Korean workers are currently in the complex, which is home to South Korean factories staffed by North Korean workers.
The remaining South Koreans were believed to be running out of food and medicines, because the North had refused to allow fresh supplies in.
But an association representing the South Korean companies in Kaesong had earlier suggested staff could be reluctant to pull out, because they wanted to protect their assets from seizure.
In 2011 North Korea said it seized assets from Mount Kumgang, a mothballed tourism site run by the two countries.
South Korea called for talks on the issue on Thursday, asking for a response by noon on Friday. Pyongyang rejected the offer, saying the South Korean "ultimatum" risked exacerbating tensions.
The Kaesong complex is the biggest contributor to inter-Korean trade and provides the North with much-needed hard currency.
The stoppage has also taken a heavy toll on South Korean firms, Yonhap news agency quoted South Korean President Park Geun-hye as saying.
The zone is seen as a litmus-test of relations between the two countries, and analysts consider such an extended shut-down to be a considerable setback.
In 2009 North Korean authorities briefly shut off entry to Kaesong industrial park after US-South Korean military drills, leaving hundreds of South Korean workers effectively trapped.
The current Kaesong ructions follow weeks of strong rhetoric from North Korea, which has been angered by tightened UN sanctions imposed after its 12 February nuclear test and by current joint US-South Korean military drills.
The past two months have seen unusually high tensions on the Peninsula, and while the rhetoric on both sides has softened slightly, the situation remains unresolved, the BBC's Lucy Williamson in Seoul reports.