The U.S. military had been observing the submarine operate off North Korea's east coast when the vessel stopped, and U.S. spy satellites, aircraft and ships have been secretly watching for days as the North Korean navy searched for the missing sub.
The U.S. is unsure if the missing vessel is adrift under the sea or whether it has sunk, the officials said, but believes it suffered some type of failure during an exercise.
Tensions have heightened on the Korean peninsula following a fourth North Korean nuclear test and joint U.S.-South Korean military drills.
On Thursday, the South Korean military said North Korea fired two short-range ballistic missiles
. They were fired from North Hwanghae province, south of Pyongyang, toward the sea east of the Korean Peninsula, the South Korean Joint Chiefs of Staff said. The South tracked the projectiles and is monitoring the situation, it said.
Also Thursday, the agency published a statement that "all agreements on economic cooperation and business exchanges adopted by North and South are invalid."
This comes after Seoul last month ordered the closure of the Kaesong industrial complex, a rare symbol of cooperation between the two Koreas.
Describing the shuttering of Kaesong as a "unilateral" move, KCNA said Pyongyang "will completely liquidate all South Korean companies and relevant assets" within its borders.
Seoul condemned the suspension of economic ties Thursday, with the Unification Ministry saying in a statement it would "never accept" the move, which it described as a "provocative action."
The statement added it would hold Pyongyang responsible for any damage to South Korean assets north of the border.
Meanwhile, around 17,000 U.S. military personnel and 300,000 South Korean troops are taking part in what the South Korean Defense Ministry described as the "largest ever" joint military exercises.
North Korea on Sunday warned it would make a "pre-emptive and offensive nuclear strike" in response to the joint exercises. On Friday, KCNA reported that North Korean leader Kim Jong Un had ordered more tests to improve his country's nuclear attack capability.
The South Korean military spokesman said the two allies were "closely monitoring" signs of North Korean provocation.
"As of now, there are no direct signs of provocation, but we are planning to continuously strengthen surveillance," Defense Ministry spokesman Moon Sang-gyun said.
Last week, KCNA reported that the North Korean leader said his country's "nuclear warheads need to be ready for use at any time."
"Under the extreme situation that the U.S. imperialist is misusing its military influence and is pressuring other countries and people to start war and catastrophe, the only way for our people to protect sovereignty and rights to live is to strengthen the quality and quantity of nuclear power and realize the balance of power," Kim said, according to the KCNA.
While Pyongyang often issues saber-rattling statements during annual U.S. and South Korean joint exercises, "this year the level of anger is much greater," says Mike Chinoy, a former CNN senior international correspondent and the author of "Meltdown: The inside story of the North Korean nuclear crisis."
Chinoy told CNN he was concerned if North Korea "takes even a modest military step, the South will feel obliged to respond."