South Korea staged a live-fire exercise Monday on a flashpoint island near the disputed border, but North Korea said it would not hit back despite having vowed deadly retaliation.
Pyongyang's announcement eased fears of war on the peninsula, where tensions have been acute since a deadly bombardment by North Korea last month following a similar artillery drill by South Korean forces.
Seoul's defence ministry said the 90-minute drill, which included some 20 US personnel, began around 2:30 pm (0530 GMT) on the tense island of Yeonpyeong.
"Our armed forces are now on alert and fighter jets are on airborne alert," a ministry spokesman said.
Yonhap news agency said two destroyers had also been deployed in the Yellow Sea south of the border.
It said the South fired 1,500 rounds from various guns including K-9 self-propelled howitzers, 105mm howitzers and 81mm mortars, a figure that officials declined to confirm.
The drill began after an emergency UN Security Council meeting failed to agree a statement on the crisis.
But in an apparent sign of compromise with its critics, the North agreed with US troubleshooter Bill Richardson to allow the return of UN atomic inspectors, CNN reported.
Hours later its military supreme command said it "did not feel any need to retaliate against every despicable military provocation".
"The world should properly know who is the true champion of peace and who is the real provocateur of a war," it said in a statement on the official news agency KCNA, blasting the "puppet warmongers" in Seoul.
The language was in marked contrast to last week, when North Korea threatened a new attack that would be "deadlier... in terms of the powerfulness and sphere of the strike".
North Korea used a November 23 live-fire exercise by South Korean marines on Yeonpyeong to justify a bombardment of the island that killed four people.
"The military must take every possible step to cope with possible provocations by North Korea," the South's Defence Minister Kim Kwan-Jin said earlier Monday.
President Lee Myung-Bak ordered all government officials on emergency standby, as close ally the United States stood by Seoul's right to self-defence.
The North disputes the Yellow Sea border drawn by United Nations forces after the 1950-53 Korean War. It claims the waters around Yeonpyeong, where shells land after the South's firing exercises, as its own.
No reason was immediately apparent for its change of heart.
But CNN correspondent Wolf Blitzer, who is travelling with Richardson in Pyongyang, said there were signs of deal-making in nuclear matters.
North Korea had agreed with the New Mexico governor, a former UN ambassador, to let inspectors from the UN's International Atomic Energy Agency return to its Yongbyon nuclear complex, Blitzer said.
It had also agreed to allow 12,000 nuclear fuel rods to be shipped to an outside country, and to the creation of a military commission and hotline between the two Koreas and the United States, Blitzer said.
Apart from its longstanding plutonium operation, the North's disclosure last month of a new uranium enrichment plant sparked fears of a potential new source of bomb-making material.
Richardson, a veteran negotiator with the North, was due to brief reporters in Beijing Tuesday morning after his flight on Monday was delayed by bad weather.
At the UN, China fended off Western demands that its ally North Korea be publicly condemned for last month's artillery assault, diplomats said.
They said it even rejected a proposed statement that did not mention North Korea or the name of Yeonpyeong.
"No one has any right to preach or promote conflict or war, and no one has any right to cause bloodshed between the peoples in the north and south of the peninsula," Vice Foreign Minister Cui Tiankai told reporters.
Seoul, which was outraged last month by the first shelling of civilian areas since the war, rejected criticism.
"As a sovereign nation, it is our just right to stage a military exercise for the defence of our territory... nobody can intervene," President Lee said.
Seoul said its exercise was a routine defensive drill, with guns pointed away from the North and shells landing 10 kilometres (six miles) south of the maritime border in place for six decades.