Han Myeong-sook, the South Korean prime minister, has called for an emergency meeting of senior government officials later on Monday to discuss the economic impact of the test.
An official at the finance ministry's public relations department said Kwon O-kyu, the finance minister, Lee Seong-taek, the Bank of Korea governor, and other economy-related ministers would attend the meeting at 3pm (0600 GMT).
The benchmark Korea Composite Stock Price Index (Kospi) fell as low as 1,303.62, or 3.6 per cent, after North Korea's official Korean Central News Agency said the underground test was performed successfully.
The Kospi was trading 2.4 per cent lower at 1,319.00 at about 1.25pm in Seoul.
The US dollar traded at 959.9 to the South Korean won, up from 949.10 last Wednesday.
Markets in South Korea, the world's 10th-largest economy, have long been considered vulnerable to potential geopolitical risks from the Democratic People's Republic of Korea.
The two countries, which fought the 1950-53 Korean war, are divided by the world's most heavily armed border.
In Hong Kong, too, share prices were sharply lower on Monday morning, shedding 1.53 per cent, after North Korea announced that it had conducted a nuclear test, prompting anxiety across the region, dealers said.
They said the news has caused concerns over regional security and a probable sharp increase in political tensions.
"The main culprit for the sharp drop of the index are reports of North Korea's nuclear test"
head of sales trading,
Daiwa Securities SMBC Hong Kong
At 11.03am (0303 GMT), the Hang Seng Index was down 274.59 points at 17,628.80.
Andrew Sullivan, head of sales trading at Daiwa Securities SMBC Hong Kong, said: "The main culprit for the sharp drop of the index are reports of North Korea's nuclear test.
"Nobody knows how this political impasse will fan out or how long it will last, and scores of investors used this as an excuse to take profit after recent strong gains in the market," he said.
Sullivan said North Korea might be trying to press the US as it was "hard-pressed for foreign currencies because the US has frozen its accounts in various US banks".
Markets in Japan and Taiwan were closed on Monday for public holidays, but other regional markets were also under pressure from the news.