New Zealand is adding its voice to international outrage over North Korea's artillery attack on South Korea's Yeonpyeong Island.

Foreign Minister Murray McCully condemned the shelling of the civilian population.

At least two South Korean marines were killed and 17 injured when the North shelled the island, near the countries' disputed border.

The shelling also set dozens of buildings ablaze and sent civilians fleeing for shelter.

North and South Korea exchanged artillery fire after the incident.

"The attack represents a new and dangerous level of aggression by the Democratic People's Republic of Korea regime, coming in the wake of the DPRK attack on the South Korean vessel, the Cheonan," Mr McCully said.

"This is a time for cool heads in order to avoid this clash escalating into a more serious threat to the stability of the region. It is also a time in which the DPRK's neighbours should leave them in no doubt that their actions are unacceptable.

"New Zealand joins other countries in expressing our sense of outrage over this attack and the consequent loss of life."

The clash, which put South Korea's military on high alert, was one of the rivals' most dramatic confrontations since the Korean War ended, and one of the few to put civilians at risk, though no non-military deaths were immediately reported. Fifteen South Korean soldiers and three civilians were injured and the extent of casualties on the northern side was unknown.

The skirmish began when Pyongyang warned the South to halt military drills in the area, according to South Korean officials.

When Seoul refused and began firing artillery into disputed waters, albeit away from the North Korean shore, the North retaliated by bombarding the small island of Yeonpyeong, which houses South Korean military installations and a small civilian population.

- AP and NZPA