South Korean Vice Defense Minister Baek Seung-joo said his government expected the North to fire at some of the 11 sites where Seoul has set up loudspeakers on its side of the Demilitarized Zone (DMZ) separating the countries.
The South earlier rejected an ultimatum that it halt anti-Pyongyang broadcasts by Saturday afternoon or face attack.
The North's Foreign Ministry said in a statement the military and the public stood ready to safeguard its regime even if it meant fighting an all-out war, and it rejected the idea of restraint in an apparent rebuff of China's calls.
Official media said Pyongyang's military was not bluffing.
China, which remains reclusive North Korea's main economic backer despite diminished political clout to influence Pyongyang, said it was deeply concerned about the escalation of tension and called for calm from both sides.
Since the 1950-53 Korean War ended in a truce, not a peace treaty, Pyongyang and Seoul have often exchanged threats, and dozens of soldiers have been killed in clashes, yet the two sides have always pulled back from all-out war.
The latest hostility is a further blow to South Korean President Park Geun-hye's efforts to improve North-South ties, which have been virtually frozen since the deadly 2010 sinking of a South Korean navy ship, which Seoul blames on Pyongyang.
Park canceled an event on Friday and made a visit to a military command post, dressed in army camouflage.
Both sides traded harsh rhetoric late into Friday night.
The North committed "cowardly criminal acts," South Korean Defense Minister Han Min-koo said. "This time, I will make sure to sever the vicious cycle of North Korea's provocations."
North Korea launched four artillery shells into South Korea on Thursday, according to Seoul, in apparent protest against the broadcasts. The South fired back 29 artillery rounds. Pyongyang accused the South of inventing a pretext to fire into the North.
Both sides reported no casualties or damage in their territory, indicating the rounds were just warning shots.
"The fact that both sides' shells didn't damage anything means they did not want to spread an armed clash. There is always a chance for war, but that chance is very, very low," said Yang Moo-jin, professor at the University of North Korean Studies in Seoul.
Joel Wit of 38 North, a North Korea monitoring project at Johns Hopkins University in Washington, said the artillery exchanges were worrying but things could well cool off again.
"When it's happened in the past, there have been dangers of escalation and the U.S. has had to restrain South Korea. It's a very dangerous situation, though it could die down and chances are, it will die down," he said.
United Nations Secretary-General Ban Ki-moon appealed on Friday for North and South Korea not to take any action that could further aggravate tensions.
SOUTH SAYS WON'T STOP BROADCASTS
The North's shelling came after it had demanded last weekend that South Korea end the broadcasts or face a military response - a relatively rare case of following up on its frequent threats against the South.
Its 48-hour ultimatum, delivered in a letter to the South Korean Defense Ministry, was also uncharacteristically specific, said John Delury, a North Korea expert at Yonsei University in Seoul. The deadline is around 5 p.m. (0800 GMT) on Saturday in Seoul.
South Korea began blasting anti-North propaganda from loudspeakers on the border on Aug. 10, resuming a tactic both sides had stopped in 2004, a few days after landmines wounded two South Korean soldiers along the DMZ.
North Korea on Monday launched its own broadcasts.
Baek told parliament the South's broadcasts would continue unless the North accepted responsibility and apologized for the mines. Pyongyang has denied responsibility.
"There is a high possibility that North Korea will attack loudspeaker facilities," Baek said.
KCNA said North Korean leader Kim Jong Un had declared a "quasi-state of war" in front-line areas.
There were indications the North was preparing to fire short-range missiles, the South's Yonhap news agency said, citing an unnamed government source. The North often fires rockets into the sea during annual U.S.-South Korean military exercises, which are currently under way.
The U.S. military, which bases 28,500 personnel in South Korea, said it was monitoring the situation. Washington earlier urged Pyongyang to halt "provocative" actions after Thursday's exchange of fire, the first between the Koreas since October.
Daniel Pinkston of the International Crisis Group think-tank said the large U.S. troop presence in the South for the military exercises could reduce the risk of escalation by pressuring the South to exercise restraint, and deterring the North.
"This is a bad time to pick a fight with the South while it has all these resources there," he said.