North Korea has made no secret of the fact that it is working to develop a nuclear-tipped missile capable of striking the U.S. mainland and has ignored calls to halt its nuclear and missile programmes, even from China, its lone major ally.
It conducted its latest ballistic missile launch, in defiance of UN Security Council resolutions, on Sunday which it said was a test of its capability to carry a "large-size heavy nuclear warhead", drawing Security Council condemnation.
"The reality is that there is a high possibility of a military conflict at the NLL (Northern Limit Line) and military demarcation line," Moon was quoted as saying by the presidential Blue House.
He also said the North's nuclear and missile capabilities seem to have advanced rapidly recently but that the South was ready and capable of striking back should the North attack.
Moon won an election last week campaigning on a more moderate approach towards the North and said after taking office that he wants to pursue dialogue as well as pressure.
But he has said the North must change its attitude of insisting on pressing ahead with its arms development before dialogue is possible.
South Korean Unification Ministry spokesman Lee Duk-haeng told reporters the government's most basic stance is that communication lines between South and North Korea should reopen.
"The Unification Ministry has considered options on this internally but nothing has been decided yet," said Lee.