The demolition of the building, which is located on North Korean territory and had no South Koreans working there, is largely symbolic.
But it's still the most provocative thing North Korea has done since it entered nuclear diplomacy in 2018 after a US-North Korean standoff had many fearing war.
It will pose a serious setback to the efforts of liberal South Korean President Moon Jae-in to restore inter-Korean engagement.
North Korea's official Korean Central News Agency said the nation destroyed the office in a terrific explosion because its enraged people were determined to force (the) human scum and those, who have sheltered the scum, to pay dearly for their crimes, apparently referring to North Korean defectors living in South Korea who for years have floated anti-Pyongyang leaflets across the border.
The agency did not detail how the office in the border town of Kaesong was destroyed.
South Korea's government later released a military surveillance video showing clouds of smoke rising from the ground as a building collapsed at a now-shuttered joint industrial park in Kaesong, which is where the liaison office stood.
South Korea expressed strong regret over the destruction and warned of a stern response if North Korea takes additional steps that aggravate tensions.
The statement, issued following an emergency National Security Council meeting, said the demolition is an act that betrays hopes for an improvement in South-North Korean relations and the establishment of peace on the Korean Peninsula.
South Korea's Defense Ministry separately said it closely monitors North Korean military activities and was prepared to strongly counter any future provocation.
The North said last week that it was cutting off all government and military communication channels with the South while threatening to abandon bilateral peace agreements reached during North Korean leader Kim Jong Un's three summits with Moon in 2018.
Some outside analysts believe the North, after failing to get what it wants in nuclear talks, will turn to provocation to win outside concessions because its economy has likely worsened because of persistent U.S.-led sanctions and the coronavirus pandemic.
North Korea may also be frustrated because the sanctions prevent Seoul from breaking away from Washington to resume joint economic projects with Pyongyang.
The South Korean response to Tuesday's demolition was relatively strong compared to past provocations. Moon's government has faced criticism that it didn't take tough measures when North Korea performed a series of short-range weapons tests targeting South Korea over the past year.
Moon, a liberal who champions greater reconciliation with North Korea, shuttled between Pyongyang and Washington to help set up the first summit between the Kim and President Donald Trump in June 2018.
The liaison office has been shut since late January because of coronavirus concerns. The office, built with South Korean money, was opened in September 2018, to facilitate better communication and exchanges.
It was the first such office between the Koreas since they were divided into a U.S.-backed South Korea and a Soviet-supported North Korea at the end of the World War II in 1945. The office was considered a symbol of Moon's engagement policy.
North Korea had earlier threatened to demolish the office as it stepped up its fiery rhetoric over what it called Seoul's failure to stop civilian leafleting campaign. South Korea said it would take steps to ban the leafleting, but North Korea argued that the South Korean response lacked sincerity.
On Saturday night, Kim Yo Jong, the influential sister of North Korea's leader, warned that Seoul will soon witness a tragic scene of the useless North-South liaison office (in North Korea) being completely collapsed.
She also said she would leave to North Korea's military the right to take the next step of retaliation against South Korea.
The North has threatened to dismantle the shuttered Kaesong factory complex completely and abandon a 2018 bilateral tension-reduction agreement, which observers say could allow the North to trigger clashes along the land and sea borders.
Earlier Tuesday, North Korea's military threatened to move back into unspecified border areas that have been demilitarized under agreements with South Korea and turn the front line into a fortress. Experts say this suggests North Korea may try to tear down factory buildings and equipment at Kaesong, mostly South Korean assets.
On Monday, Moon urged North Korea to stop raising animosities and return to talks, saying the two Koreas must not reverse the 2018 inter-Korean summit deals.
North Korea has a history of taking highly visual symbolic steps for political gains. It invited foreign journalists to watch the detonation of its underground nuclear testing tunnels in 2018 and the demolition of a cooling tower at its main nuclear complex in 2008. Both events were an attempt by the North to show it was serious about denuclearization amid rampant outside skepticism about its commitment.