The two Koreas had agreed a week earlier to work on resuming a formal high-level dialogue that has effectively been suspended for seven months, raising hopes of a thaw in strained relations.
But they traded heavy machine-gun fire across their border Friday when North Korean troops tried to shoot down balloons carrying leaflets launched by South Korean activists.
Some rounds fell on the southern side of the border, which then responded with high-calibre machine gun fire.
No casualties were reported on either side.
Rodong Sinmun, the North's official newspaper, said in a commentary that the planned high-level meeting has "virtually come to nothing".
"How can we expect improvement in inter-Korean relations or fruitful dialogue with those obsessed by malicious delusions ... and immersed in reckless provocations slandering the dialogue partner?," it said.
The newspaper accused Seoul of driving the situation to catastrophe but did not say the door for dialogue was completely shut.
"The future of inter-Korean relations is totally up to the attitude of South Korean authorities," it said without mentioning the exchange of fire.
While naval confrontations along the Koreas' disputed maritime border occur from time to time, any military engagement across the heavily-militarised land frontier is extremely rare.
In 2010, the North shelled the South Korean border island of Yeonpyeong, killing four people and briefly sparking fears of a full scale conflict.
The balloon launch was one of several planned to coincide with North Korea's celebration of the 69th anniversary of its ruling Workers' Party.
Seoul allowed the exercises to go ahead, despite prior warnings from Pyongyang of "catastrophic" consequences.
Some of the balloons carried messages denouncing North Korean leader Kim Jong-Un, who has not been seen in public for more than a month.
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