The comments came hours after the South, which hosts 28,500 US troops, said it wanted to reopen a channel of dialogue with North Korea as Moon seeks a two-track policy, involving sanctions and dialogue, to try to rein in its neighbour.
North Korea has made no secret of the fact that it is working to develop a nuclear-tipped missile capable of striking the US 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.
NO WORD YET ON THAAD
Communications were severed by the North last year, Lee said, in the wake of new sanctions following North Korea's fifth nuclear test and Pyongyang's decision to shut down a joint industrial zone operated inside the North.
Moon's envoy to the United States, South Korean media mogul Hong Seok-hyun, left for Washington on Wednesday. Hong said South Korea had not yet received official word from the United States on whether Seoul should pay for an anti-missile US radar system that has been deployed outside Seoul.
US President Donald Trump has said he wants South Korea to pay for the Terminal High Altitude Area Defense (THAAD) anti-missile system which detected Sunday's test launch.
China has strongly opposed THAAD, saying it can spy into its territory, and South Korean companies have been hit in China by a nationalist backlash over the deployment.
The United States said on Tuesday it believed it could persuade China to impose new UN sanctions on North Korea and warned that Washington would also target and "call out" countries supporting Pyongyang.
Speaking to reporters ahead of a closed-door UN Security Council meeting, U.S. Ambassador to the United Nations Nikki Haley also made clear that Washington would only talk to North Korea once it halted its nuclear programme.
Trump has called for an immediate halt to North Korea's missile and nuclear tests and US Disarmament Ambassador Robert Wood said on Tuesday that China's leverage was key and Beijing could do more.
Trump warned this month that a "major, major conflict" with North Korea was possible, and in a show of force, sent the Carl Vinson aircraft carrier strike group to Korean waters to conduct drills with South Korea and Japan.
The US troop presence in South Korea, a legacy of the Korean War, is primarily to guard against the North Korean threat.
(Additional reporting by Michelle Nichols at the UNITED NATIONS; Editing by Nick Macfie)