Khartoum sent tanks into Abyei town, the area's main settlement, on Saturday, the United Nations said after weeks of growing tension and accusations of skirmishes by both sides.
Both the United States and Britain condemned the escalation of violence in the fertile border region, claimed by both north and south.
Control over Abyei remains the biggest point of contention in the countdown to the secession of south Sudan, expected in July.
Southerners overwhelmingly voted to declare independence from the north in a January referendum, promised in a 2005 peace deal that ended decades of north-south civil war.
Analysts say Abyei is the most likely place to trigger a return to civil war, a development that could have a devastating impact on Sudan's neighbours which include Kenya, Uganda and Ethiopia. UN officials said the north had sent at least 15 tanks into Abyei town.
"Most residents in Abyei town left (on Saturday] and have gone south. There are reports of looting by armed groups," UN spokeswoman Hua Jiang said, adding the town's population was estimated at around 20,000.
North Sudan said it had sent in the troops to clear out southern soldiers that it said had entered the area, breaking the terms of earlier agreements.
"The Sudanese armed forces control Abyei and are cleansing it of illegal forces," Amin Hassan Omar, a minister of state for presidential affairs, told reporters after meeting a delegation of the UN Security Council in Khartoum.
"The government is committed to the peace agreement, but the southern army wanted to enforce a unilateral solution," he said.
The northern ruling party of president Omar al-Bashir also issued a statement backing the northern armed forces, which it said were "entrusted with protecting Sudan's territory and stability and the security of its citizens in the south and north".
The southern army (SPLA) accused the north of shelling villages and said it had withdrawn its forces from Abyei town after the north moved in.
"We call on the United Nations to protect civilians," said southern army (SPLA) spokesman Philip Aguer.
He added: "We are worried about our troops. Communications are poor, we cannot get through to them."
The White House condemned the north's military operations in Abyei as "disproportionate and irresponsible" and urged leaders of both sides to meet and negotiate a settlement.
William Hague, the Foreign Secretary, condemned the attack on Abyei town, and an earlier ambush that was blamed on southern soldiers. "I call on all sides to cease hostilities immediately. All unauthorised forces should be withdrawn from the entire area of Abyei," he said.
The mainly Muslim north and the south, where most people follow Christian and traditional beliefs, fought for decades in a civil war that killed an estimated two million people.
The 2005 peace deal promised Abyei residents their own referendum over whether they wanted to join the north or the south. But that vote never took place after both sides failed to agree over who was qualified to vote.
Attempts to agree Abyei's status through negotiations have also stalled.
The north supports the Arab Misseriya tribe that grazes its cattle for parts of the year in Abyei, while the south has strong links to the Dinka Ngok tribe that lives there all year round.