A North Korean submarine's torpedo sank a South Korean navy ship on 26 March causing the deaths of 46 sailors, an international report has found.
Investigators said they had discovered part of the torpedo on the sea floor and it carried lettering that matched a North Korean design.
Pyongyang rejected the claim as a "fabrication" and threatened war if sanctions were imposed, say reports.
China has urged both countries to show restraint.
South Korean President Lee Myung-bak pledged to take "stern action" against the North.
The White House described the sinking of the ship as an "act of aggression" by North Korea that challenged peace.
UN Secretary General Ban Ki-moon said the report was "deeply troubling".
Pyongyang said it would send its own inspection team to the South to "verify material evidence" behind the accusation.
A North Korean defence spokesman said the country would "respond to reckless countermeasure with an all-out war of justice", the state KCNA news agency reported.
Chinese foreign ministry spokesman Ma Zhaoxu said Beijing had "noted" the report and would make its own assessment, but called on both sides to exercise restraint.
The Cheonan went down near the disputed inter-Korean maritime border, raising tension between the two nations, which technically remain at war.
The shattered wreck of the 1,200-tonne gunboat was later winched to the surface, in two pieces, for examination.
The investigation was led by experts from the US, Australia, Britain and Sweden. The team examined eyewitness accounts, damage to the vessel, evidence collected from the seabed and the injuries sustained by survivors and those who died.
It said: "The evidence points overwhelmingly to the conclusion that the torpedo was fired by a North Korean submarine.
"There is no other plausible explanation."
Monitoring of seismic activity in the region, damage to the ship and the "fractures and lacerations" sustained by the dead crew were all consistent with "damage resulting from a shockwave and bubble effect" caused by an explosion directly beneath the vessel, it said.
The report said the torpedo parts found "perfectly match" a torpedo type that the North manufactures.
Lettering found on one section matched that on a North Korean torpedo found by the South seven years ago.
There had earlier been a number of explanations suggested for the sinking, including an accidental collision with an unexploded sea mine left over from the Korean War.
Mr Lee's presidential office said he had told Australian Prime Minister Kevin Rudd: "We will be taking firm, responsive measures against the North - and through international co-operation, we have to make the North admit its wrongdoing and come back as a responsible member of the international community."
However, the BBC's John Sudworth in Seoul says agreeing an international response will be difficult as the diplomatic options will be limited.
Chinese Vice Foreign Minister Cui Tiankai said on Thursday the sinking of the vessel was "unfortunate" but he would not comment on the international report.
White House spokesman Robert Gibbs said US President Barack Obama had expressed his "deep sympathy" to Mr Lee and the Korean people and that the US "strongly condemned" the action.
"This act of aggression is one more instance of North Korea's unacceptable behaviour and defiance of international law," said Mr Gibbs, adding that it "only deepens North Korea's isolation".
He called the alleged attack "a challenge to international peace and security" and a violation of the armistice agreement which ended the Korean war.
But he said it had reinforced the resolve of North Korea's neighbours "to intensify their co-operation to safeguard peace and stability in the region against all provocations".
Japan's Prime Minister Yukio Hatoyama said in a statement that North Korea's action was "unforgivable".
The country's chief cabinet secretary, Hirofumi Hirano, said the situation was "extremely regrettable" and would "evidently" be brought before the UN.
The British embassy in Seoul quoted Foreign Secretary William Hague as saying: "[North Korea's] actions will deepen the international community's mistrust. The attack demonstrates a total indifference to human life and a blatant disregard of international obligations."