A defense ministry spokesman confirmed the three-day drill -- condemned as a "warmongering" exercise by North Korea -- was underway in the East Sea (Sea of Japan) off the southeastern South Korean port of Pohang.
Although South Korean military officials stressed the drill was scheduled before the North threatened to detonate its third nuclear device, the presence of the submarine has been seen as a warning to Pyongyang.
The USS San Francisco, armed with Tomahawk cruise missiles, is joined in the drill by a 9,800-tonnes Aegis destroyer, the USS Shiloh.
"The exercise includes at-sea operating training, detecting and tracking a submarine, anti-air and anti-ship live fire training and anti-missile training," the Yonhap news agency quoted one military official as saying.
The drill comes as the North has ramped up daily threats of a nuclear test in response to expanded U.N. sanctions imposed after its long-range rocket launch in December.
The North insists the launch was a purely scientific mission aimed at putting a satellite in orbit.
But most of the world viewed it as a disguised ballistic missile test that violated U.N. resolutions triggered by the North's previous nuclear tests in 2006 and 2009.
Seoul's defence ministry spokesman Kim Min-Seok told reporters Monday that the North had completed all technical preparations for another nuclear test.
"The only thing left to make is a political judgment," Kim said, calling on Pyongyang to show restraint.
Recent satellite imagery has confirmed activity at the northeastern nuclear test site at Punggye-ri, with the North covering the entrance to a test tunnel in an apparent attempt to external monitoring.
Over the past week Pyongyang has issued a series of daily warnings threatening action over the sanctions, including a promise Saturday of the "toughest retaliation".
On Sunday, state media reported that the North's young leader, Kim Jong-Un, had chaired a high-level meeting to discuss a "great turn" in bolstering military capability and issue "important" guidelines to top officials.
Seoul's top nuclear envoy left for Beijing on Sunday to meet with his Chinese counterpart in an apparent last ditch effort to avert another test.
The North's only major ally and economic lifeline, China is seen as the only country with any real leverage over the regime in Pyongyang.
Beijing also chairs the stalled six-nation nuclear disarmament forum on the North, which involves the two Koreas, Japan, the United States and Russia.
The North withdrew from the aid-for-denuclearization talks in April 2009 and staged its second atomic test a month later.
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