The two-week annual Ulchi Freedom drill, which plays out a full-scale invasion scenario by the nuclear-armed North, is largely computer-simulated but still involves around 50,000 Korean and 25,000 US soldiers.
The exercise always triggers a spike in tensions on the divided Korean peninsula, and this year it coincides with particularly volatile cross-border relations following a series of high-profile defections.
Seoul and Washington insist the joint military drills are purely defensive in nature, but Pyongyang views them as wilfully provocative.
The Korean People's Army (KPA), meanwhile, threatened a military response to what it described as a rehearsal for a surprise nuclear attack and invasion of the North.
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North Korea's frontline units were "fully ready to mount a preemptive retaliatory strike at all enemy attack groups involved," said a spokesman for the KPA General Staff.
The slightest violation of North Korea's territorial sovereignty would result in the source of the provocation being turned "into a heap of ashes through Korean-style pre-emptive nuclear strike," the spokesman said.
As the drill began, South Korean President Park Geun-Hye said a recent spate of headline-grabbing defections from North Korea signalled political turmoil in Pyongyang that could cause the leadership there to lash out against the South.
"It is increasingly possible that North Korea may undertake various terror attacks and provocations... To block internal unrest, prevent further defections and create confusion in our society," Park told a meeting of her National Security Council.
Her comments came a day after the Unification Ministry in Seoul urged all citizens to be on guard against possible North Korean assassination attempts on defectors and anti-Pyongyang activists in the South.
Analysts say there is a genuine risk of an unintended incident escalating into a military clash, given the current absence of direct communication between the two Koreas.
As tensions rose in the wake of North Korea's fourth nuclear test in January, Pyongyang shut down the two existing hotlines with South Korea - one used by the military and one for government-to-government communications.