North Korea warned on Thursday  of a 'holy war' against the South using its nuclear deterrent  as South Korean President Lee Myung-bak vowed a 'merciless  counterattack' if its territory is attacked again.

Both sides were raising the rhetoric on a day South Korea launched major land and sea military exercises, prompting  North Korea to denounce its richer neighbour as a warmonger.

'To counter the enemy's intentional drive to push the  situation to the brink of war, our revolutionary forces are  making preparations to begin a holy war at any moment  necessary based on nuclear deterrent,' North Korea's KCNA news  agency quoted Minister of Armed Forces Kim Yong-chun telling a  rally in Pyongyang.

North Korea regularly threatens to destroy the South and  its major ally, the United States, and has wielded the threat  of its nuclear deterrent before, despite analysts saying it  has no way to launch a nuclear device.

Lee said on a tour of a South Korean forward army base  overlooking North Korean territory that the South would not  relax its readiness to counter any aggression by the North.

'We had believed patience would ensure peace on this land,  but that was not the case,' Lee, criticised for perceived  earlier weakness to North Korean attacks, told troops.

South Korea held a major land drill in the Pocheon region,  between Seoul and the heavily armed demilitarised zone (DMZ)  separating the two Koreas. It also continued naval live-fire  exercises 100 km (60 miles) south of the maritime border with  North Korea.

The drill involves a larger scale of firepower and  personnel than usual for an exercise at the army training  ground, a further indication that Lee wants to show the public  his government can stand up to the North.

A large contingent of mechanised units operating tanks,  three dozen self-propelled artillery, fighter jets and  multiple rocket launchers, took part in the live-fire drill  just miles from the border. It lasted just under an hour.

Lee has replaced his top defence officials with more  hawkish military men, a response to criticism of his response  to hostile acts from the North, including an attack on a ship  in March and the shelling of Yeonpyeong island last month.

'(South Korea) is trying to hide the provocative nature  toward the North of the war exercises,' the North's KCNA said  earlier in a comment, calling the drills 'madcap' and  'offensive' and referring to the South Korean military as  'puppet warmongers', an insult it frequently deploys.

The South Korean army is making no secret that the drill  is aimed at displaying its firepower to its neighbor.

'We are facing a crisis because of North Korea, so I came  to see this air and ground operation. I want to feel and see  the level of South Korea's armed forces,' said Kim Tae-dong, a  70-year-old internet businessman, in Pocheon.

'Another North Korean provocation will happen. We should  prepare our military perfectly for that.”

Seoul's financial markets closed flat, with investors  shrugging off the tension. Pyongyang's threatening remarks  have in the past failed to have a lasting effect. – Reuters