Young adults would either choose to join military full-time for 12 months or spend one weekend every month volunteering in their community over a year
South Korean media reported that an explosion was heard and smoke could be seen over Kaesong, and the South's Unification Ministry said the liaison office had been destroyed.
A South Korean military source said that there were signs of the impending demolition earlier in the day, and South Korean military officials watched live surveillance imagery of the building as it was blown up.
Tensions have risen as Pyongyang threatened to sever inter-Korean ties and take retaliatory measures over the leaflets, which carry messages critical of North Korean leader Kim Jong Un, including human rights abuses.
On Saturday, North Korean state media reported that Kim Yo Jong, the sister of Kim who serves as a senior official of the ruling Workers' Party, had ordered the department in charge of inter-Korean affairs to "decisively carry out the next action" and that "before long, a tragic scene of the useless north-south joint liaison office completely collapsed would be seen".
The inter-Korean liaison office was established in 2018 as part of a series of projects aimed at reducing tensions between the two Koreas.
When it was operating, dozens of officials from both sides would work in the building, with South Koreans travelling each week into the North.
The office has been closed since January over coronavirus fears.
Earlier on Tuesday, North Korean state media quoted the military as saying it has been studying an "action plan" to re-enter zones that had been demilitarised under a 2018 inter-Korean pact and "turn the front line into a fortress".
"Our army will rapidly and thoroughly implement any decisions and orders of the party and government," the Korean People's Army said in a statement carried by the official KCNA news agency.
Seoul's defence ministry called for Pyongyang to abide by the 2018 agreement, in which both sides' militaries vowed to cease "all hostile acts" and dismantled a number of structures along the heavily fortified Demilitarised Zone between the two countries.
"We're taking the situation seriously," ministry spokeswoman Choi Hyun-soo told a briefing. "Our military is maintaining readiness posture to be able to respond to any situation."
Several defector-led groups have regularly sent back flyers, together with food, $1 bills, mini radios and USB sticks containing South Korean dramas and news, usually by balloon over the border or in bottles by river.
South Korea plans legal action against two of the defector groups, saying their actions fuel cross-border tensions, pose risks to residents living near the border and cause environmental damage.
But the groups say they intend to push ahead with their planned campaign this week.
South Korea's President Moon Jae-in urged Pyongyang on Monday to keep peace agreements reached by the two leaders and return to dialogue.
Young adults would either choose to join military full-time for 12 months or spend one weekend every month volunteering in their community over a year
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