KCNA said the North was also expelling all South Korean workers from a jointly-run factory north of the border.
The move comes after an international report blamed North Korea for sinking a South Korean warship.
Pyongyang denies it torpedoed the Cheonan near the inter-Korean maritime border on 26 March, killing 46 sailors.
Seoul announced on Sunday it was ending trade relations with the North in response to the sinking.
South Korea says it plans to refer North Korea to the UN Security Council, and is seeking a unified international response to the incident.
Tuesday’s KCNA reports announcing the severing of all ties – including communications – said the North was also banning South Korean ships and planes from its territorial waters and airspace.
Within a matter of days, relations between the two Koreas have returned to the freezer.
The diplomatic goal now will be to ensure that a renewed cold war on the Korean peninsula does not generate into a hot conflict, he adds.
US Secretary of State Hillary Clinton has said Washington and Beijing must work together to “fashion an effective response” to the sinking of the Cheonan.
Speaking in Beijing, Mrs Clinton said maintaining peace on the Korean peninsula was “a shared responsibility” between the countries.
China has called for all sides to show restraint, adding its voice to calls for international co-operation over the incident.
Vice Foreign Minister Cui Tiankai said Beijing was “ready to work together with the US and other parties and continue to stay in close touch on the situation on the Korean peninsula”.
