The United States and China on Tuesday called on the UN Security Council to sanction North Korean diplomats and "illicit" cash transfers to step up pressure on Pyongyang's nuclear program.

But the isolated North fueled tensions, threatening to scrap an armistice that halted the 1950-53 Korean War and warning that it could launch "strong" counter-measures against what it called US hostility.

US ambassador Susan Rice circulated the text of a sanctions resolution to the other 14 members of the Security Council on Tuesday. Diplomats said a vote could be held on Thursday.

The proposed measures would "take the UN sanctions imposed on North Korea to the next level, breaking new ground and imposing significant new legal obligations," Rice told reporters after the closed council meeting.

"For the first time ever, this resolution targets the illicit activities of North Korean diplomatic personnel, North Korean banking relationships, illicit transfers of bulk cash and new travel restrictions."

She said that if passed, the measures "will significantly impede North Korea's ability to develop further its illicit nuclear and ballistic missile programs."

The United States and China have been negotiating the measures since the North staged its third nuclear test on February 12.

The Security Council imposed strong sanctions after the North's weapons tests in 2006 and 2009. These were expanded after the North launched a long-range rocket in December in breach of UN resolutions.

Diplomats said there had been "tough talks" between the United States and China on the proposed sanctions hammered out by Rice and China's UN envoy Li Baodong.

Li told reporters there had been "some different views" on how to respond but added that China supports Security Council action.

China opposes North Korea's nuclear test and the international community has "got to bring an end to that program. That's why we need a strong signal," Li said.

"We think that action should be proportionate, should be balanced and focus on bringing down the tension and focusing on the diplomatic track," Li added.

Rice said that the proposed resolution vows "further significant measures in the event of another launch or nuclear test."

But ahead of the meeting North Korea threatened to scrap the historic armistice that has helped keep the peace on the Korean peninsula for the past six decades.

The North's military said in a statement that it would cut off a military hotline in the truce village of Panmunjom, which straddles the heavily fortified border with South Korea.

It also threatened "strong" additional countermeasures in response to what it called US hostility.

The armistice will be "completely" nullified from March 11, when military exercises by South Korean and US forces get into full swing, said the statement.

The annual Foal Eagle exercise began on March 1 and will run until April 30, involving more than 10,000 US troops and a far greater number of South Korean military.

Pyongyang habitually denounces such drills as a provocative rehearsal for invasion. The North has threatened in the past to scrap the armistice at times of high tension.

Pyongyang's February 12 nuclear test was the most powerful it has conducted yet. Diplomats and experts have said it is possible a new test could be staged.

"It remains our hope that they will change course and recognize that a denuclearized Korean peninsula is in the interest not only of North Korea but of international peace and security," said Rice.

But she added "the more provocations that occur, the more isolated and impoverished, sadly, North Korea will become."

The UN Security Council already has one of its toughest sanctions regimes ever imposed against North Korea.

In 2006, it ordered an embargo on arms and material for ballistic missiles. It also banned exports of luxury goods and named North Korean individuals and companies to be subject to a global assets freeze and travel ban.

In 2009, the council banned North Korea's weapons exports and ordered all countries to search suspect shipments.