The Japanese government says North Korea has fired a missile towards the country's north.
US President Donald Trump says all options to respond to North Korea are on the table after Pyongyang fired a ballistic missile over Japan.
"The world has received North Korea's latest message loud and clear: this regime has signaled its contempt for its neighbours, for all members of the United Nations, and for minimum standards of acceptable international behaviour," Trump said in the statement released by the White House.
"Threatening and destabilising actions only increase the North Korean regime's isolation in the region and among all nations of the world. All options are on the table," he said.
The missile flew over Hokkaido island before crashing into the sea. Tuesday's test, one of the most provocative ever from the reclusive state, came as US and South Korean forces conduct annual military exercises on the peninsula, to which North Korea strenuously objects.
North Korea has conducted dozens of ballistic missile tests under leader Kim Jong Un, the most recent on Saturday, but firing projectiles over mainland Japan is rare.
Japanese Prime Minister Shinzo Abe called it a threat to his country.
"North Korea's reckless action is an unprecedented, serious and a grave threat to our nation."
Abe said he spoke to US President Donald Trump on Tuesday and they agreed to increase pressure on North Korea.
South Korea's military said the missile was launched from near the North Korean capital, Pyongyang, reaching an altitude of about 550km.
Four South Korean fighter jets bombed a military firing range on Tuesday after President Moon Jae-in asked the military to demonstrate capabilities to counter North Korea.
South Korea and the United States had discussed deploying additional "strategic assets" on the Korean peninsula, the presidential Blue House said in a statement, without giving more details.
North Korea remained defiant.
"The US should know that it can neither browbeat the DPRK with any economic sanctions and military threats and blackmail nor make the DPRK flinch from the road chosen by itself," North Korea's official Rodong Sinmun said.
Global markets reacted to the escalation in tension, buying safe-haven assets such as gold, the Swiss franc and even the Japanese yen on expectation domestic investors would bring large amounts of currency home in times of uncertainty.
Stocks fell, with Japan's Nikkei 225 index closing down half a per cent, and South Korea's KOSPI index 0.25 per cent lower.
Some experts said the test appeared to have been of a recently developed intermediate-range Hwasong-12 missile, but there was no clear consensus.
This month, North Korea threatened to fire four missiles into the sea near the US Pacific territory of Guam after Trump said it would face "fire and fury" if it threatened the United States.
"Alas, Pyongyang has demonstrated that its threats to the US base on Guam are not a bluff," Konstantin Kosachev, chairman of Russia's upper house of parliament's international affairs committee, said on social media.
China called for restraint from all sides.
Japan's Chief Cabinet Secretary Yoshihide Suga said the latest missile fell into the sea 1,180km east of Cape Erimo on Hokkaido.
Television and radio broadcasters broke into their regular programming with a "J-Alert" warning citizens of the missile launch.
"I was woken by the missile alert on my cellphone," said Ayaka Nishijima, 41, an office worker on Honshu island.
"I didn't feel prepared at all. Even if we get these alerts there's nowhere to run. It's not like we have a basement or bomb shelter, all we can do is get away from the window," she told Reuters by text message.
The UN Security Council would meet later on Tuesday to discuss the test, diplomats said.