Moon, who was sworn in last week, warned that the North's nuclear and rocket programmes were "advancing rapidly", days after Pyongyang launched what appeared to be its longest-range missile yet.
"I will never tolerate the North's provocations and nuclear threats," he said on a visit to the defence ministry, urging the South's military to adopt a "watertight defence posture".
"We are living in the reality where there is a high possibility of military clashes" along the disputed sea border off the Koreas' west coast or along the heavily-fortified land frontier that divides them, he said.
Tensions between Washington and Pyongyang have ramped up in recent weeks with the Trump administration saying military action was an option under consideration and the North threatening massive retaliation.
Left-leaning Moon favours engagement with the North to bring it to the negotiating table, but after Sunday's missile launch said dialogue would be possible "only if Pyongyang changes its behaviour".
The North claimed the rocket was capable of carrying a nuclear warhead, although there are doubts whether the country could build a warhead small enough to fit into a missile.
The two Koreas - technically still at war after the 1950-53 conflict ended only with a ceasefire instead of a peace treaty - have occasionally clashed along the border.
The North's shelling in 2010 of the southern border island of Yeonpyeong killed four people in the first attack on civilians since the war, sparking brief fears of an all-out conflict.
The flashpoint border on the Yellow Sea also saw a South Korean naval submarine sinking with the loss of 46 lives in 2010. Seoul blamed a torpedo attack by the North, which angrily denied involvement.
The North has staged two atomic tests and dozens of missile tests in its quest to build a missile capable of delivering a nuclear warhead to the US mainland.
The growing threats from the North prompted Seoul to recently deploy a powerful US anti-missile system despite angry opposition by China that sees it as a threat to its own military capability.
The Terminal High Altitude Area Defense (THAAD) and the North's threats are expected to be high on the agenda when Moon meets US President Donald Trump in June.
The summit, the first between the two leaders, will be held in Washington D.C. Moon's office said the event was aimed at "cementing personal ties" between the two.
