North Koreans have failed to report for work at the Kaesong Industrial Complex, suspending one of the few points of co-operation between the Koreas, the British Broadcasting Corporation reported on Tuesday.
The complex is a joint industrial park and there are more than 120 South Korean companies that operate there, employing 53,000 North Korean workers.
It is seen as a crucial source of hard currency for North Korea.
The move is the latest in a series of provocations that have raised tensions in the Korean peninsula and the region.
“As of now, no North Korean workers have reported to work this morning,” a spokesperson for the South Korean Unification Ministry said.
The ministry added that 77 South Korean workers would leave the zone on Tuesday, but 479 were still inside Kaesong.
The complex was inaugurated in 2003 and was largely funded by South Korea.
Seoul had said the purpose of the complex was to develop a joint industrial park where South Korean companies could manufacture their products using North Korean labour.
It said that would help North Korea start to reform its economy, which is in a dire state, and ease tensions between the two Koreas.
South Korea had given incentives to companies to try and encourage them to set up operations there.
These include political risk insurance to cover losses in their investment.
As a result, if the project is threatened, South Korea also tends to lose.
South Korean President Park Geun-hye said the boycott by North Korea would harm the country’s credibility.
“Investment is all about being able to anticipate results and trust and when you have the North breaking international regulations and promises like this and suspending Kaesong while the world is watching, no country in the world will invest in the North,” she told a cabinet meeting in Seoul.
“I don’t know what to do, honestly. I can’t simply tell my workers to leave or stay,” an executive from a South Korean clothing firm told the Reuters news agency.
“North Korean workers didn’t talk a lot, but they appeared to have complaints about Kaesong being closed,” the agency also quoted South Korean worker Sing Dong-chul as saying.
“They worried whether they would be working or not.”
Seen as a litmus test of relations on the Korean peninsula, Kaesong also provides hard currency for the North through taxes and workers’ wages.
South Korean companies pay more than $80m (£52m) a year in salaries. As a whole, the Kaesong complex produced $470m worth of goods last year.
It accounts for nearly all inter-Korean trade.
The BBC’s Lucy Williamson, reporting from Seoul, said that for almost a decade the joint industrial zone has chugged on, through North Korean nuclear tests, rhetoric, and even military clashes with the South.