North Korea faces collapse if it does not abandon its nuclear bomb programme, South Korea's president warned.
President Park Geun-hye was making a nationally televised parliamentary address defending her decision to shut down a jointly run factory park in North Korea.
She said South Korea will take unspecified "stronger and more effective" measures to make North Korea realise its nuclear ambitions will result only in speeding up its "regime collapse".
Ms Park shut the park in response to the North's recent long-range rocket test, which Seoul and Washington see as a test of banned ballistic missile technology.
North Korea last month also conducted a nuclear test. Both developments put the country further along it its quest for a nuclear armed missile that could reach the US mainland.
Ms Park said the North has diverted much of the Seoul payments to North Korean workers at the factory park to the Pyongyang leadership, which is in charge of nuclear and missile development.
She also said the South has sent more than £2 billion in government and civilian aid to the North since the mid-1990s.
Much of the aid was made when South Korea was governed by liberal governments seeking rapprochement with North Korea from 1998 to 2003, according to her office.
Ms Park said South Korea must not provide large-scale aid to North Korea with few strings attached "like in the past".
She called for support for her government amid a divide in South Korea about its tough response to North Korea.
"Aiming the point of a sword back to us and splitting us up are something that must not take place," she said.
South Korea's main liberal opposition party has criticised the government's decision to suspend operations at Kaesong, saying the measure will hurt only South Korean businessmen and deepen tensions with North Korea.
Some analysts have said that without Kaesong as leverage, South Korea's ability to influence change in the North has now evaporated.
Ms Park's speech contained harsh language, describing North Korea as "merciless" and under an "extreme reign of terror" following recent purges of senior officials that outside analysts say were aimed at bolstering leader Kim Jong Un's grip on power.
Her comments are certain to anger North Korea as they were made as the country marks the birthday of late dictator Kim Jong Il.
In response to Seoul's Kaesong shutdown decision, Pyongyang last week expelled all the South Korean workers there, put its military in charge of the area, and cut off key communication hotlines between the Koreas.