North and South Korea are technically still at war, although an agreement to drop weapons was signed in 1953.
The Christian Council of Korea (CCK) wanted the new Christmas tower to be a symbol of religious freedom and peace.
A previous tower decorated with a cross by Christians stood at the border for several years, but it was taken down by the South Korean army earlier over safety fears.
North Korea said they saw the previous tower as religious and political propaganda, and had threatened to destroy it.
At the beginning of the month, South Korea authorities gave permission to the CCK to erect the new, smaller tower.
But North Korea said the CCK would be responsible for a "catastrophic impact" if it did so.