Update: CNN mistakes audio from Coast Guard for the real thing, and reports it. The White House went after CNN, saying, "Before we report things like this, checking would be good." Update: Sounds like a combination of extremely ill-advised military exercise and media misinterpretation of it led to the brief panic:

D.C. police say a Coast Guard vessel that appeared to fire live shots at a recreational boat on the Potomac River Friday morning was nothing more than a training exercise and posed no public threat. Video footage of the incident sparked widespread media coverage and speculated as to whether the allegedly "suspicious vessel" could be linked to commemorations of the eighth anniversary of the Sept. 11. 2001 attacks, including a wreath-laying by President Obama at the Pentagon memorial that happened around the same time as the incident.

Fox News reports the Coast Guard says no shots were fired, contradicting earlier media reports:

Coast Guard Chief Keith Moore said Friday no shots were fired as part of the exercise. Media reports suggested shots had been fired in the river. Even so, the timing of the exercise demonstrated poor judgment and is certain to draw inquiries into who authorized it.

CNN reports the Coast Guard confronted a boat in a secure area of the Potomac, between the Memorial and 14th St. Bridges:

The U.S. Coast Guard tried Friday to prevent a boat from entering a security zone on the Potomac River not far from the Pentagon, where President Obama was at an event commemorating the September 11 attacks. There were reports on police scanners that the Coast Guard fired 10 rounds of ammunition, but those reports could not immediately be confirmed. It was not immediately clear from the reports whether they referred to warning shots. The incident took place between the Memorial and 14th Street bridges, in a zone that had been blocked off because of the ceremonies.

The AP calls it a training exercise, which is the explanation dominating discussion on Twitter. The Washington Times also calls it an exercise, but with no shots fired.

The Coast Guard was conducting a training exercise in the Potomac River moments before President Barack Obama and his motorcade crossed a nearby bridge. Coast Guard Chief Keith Moore said Friday no shots were fired as part of the exercise. Media reports suggested shots had been fired in the river.

Unfortunate timing for an exercise.