Asia's two big powers have been embroiled in their worst diplomatic row in years, sparked by a territorial dispute that has escalated into protests, scrapped meetings and allegations China is freezing exports of vital minerals.

All eyes in Vietnam's capital have been on the sparring match and whether the rival premiers, China's Wen Jiabao and Japan's Naoto Kan, would hold highly anticipated direct talks.

The prospects appeared good after Japanese Foreign Minister Seiji Maehara met with his China counterpart early Friday, saying they had agreed to improve ties and that the two-way summit would "probably take place in Hanoi".

But there was confusion later as the Japanese delegation announced the leaders' meeting would take place, and then shortly afterwards retracted its statement.

China's assistant foreign affairs minister Hu Zhengyue then used extremely strong terms to condemn Japan's behaviour ahead of the 16-nation East Asia Summit.

"Japanese diplomatic authorities have partnered with other nations and stepped up the heat on the Diaoyu island issue," he said, referring to disputed East China Sea islands known as the Senkaku in Japan.

He said the comments had "violated China's sovereignty and territorial integrity."

"The Japanese moves, which is clear for everyone to see, have ruined the needed atmosphere for a meeting between the two leaders. Japan should take full responsibility for the result."

China also voiced strong dissatisfaction over remarks by US Secretary of State Hillary Clinton that the disputed islands fall within the scope of the US-Japan security alliance.

"The Chinese government and people will never accept any word or deed that includes the Diaoyu (Senkaku) islands within the scope of the US-Japan Treaty of Mutual Cooperation and Security," foreign ministry spokesman Ma Zhaoxu said in a statement on the ministry website.

The neighbours have been feuding since the September 8 arrest of a Chinese trawler captain after a collision with Japanese coastguard vessels near the disputed island chain in the resource-rich East China Sea.

Kan's spokesman Noriyuki Shikata said there was no reason for "heightened tensions... between the two countries."

"I don't see the kind of basis for that kind of reaction," he told reporters in Hanoi. "We are ready to engage in dialogue."

The United States called on China and Japan to hold talks to ease tensions.

"We want China and Japan to sit down, to have dialogue and work through the issues" surrounding disputed islands and a recent sea collision, State Department spokesman Philip Crowley told reporters in Washington.

"We would hope that both countries will take affirmative steps to de-escalate tensions around this issue and that will create the conditions for a meaningful dialogue," Crowley said.

However, there was progress in Hanoi Friday on another Asian faultline as China's Wen said he would visit India this year and stressed there was "enough space in the world" for both the rival neighbours to prosper despite a backdrop of frosty ties.

Border disputes, a short war in 1962 and the presence in India of Tibet's spiritual leader the Dalai Lama have all contributed to an atmosphere of suspicion between India and China.

India is also watchful of China's growing presence in the region, including investments in ports in Bangladesh, Sri Lanka and Pakistan.

But Wen told his Indian counterpart Manmohan Singh on the sidelines of the summit that the two nations should "steadily ensure friendship" and "increase mutual trust in politics".

"There is enough space in the world for China and India to develop themselves at the same time, and there are enough sectors for China and India to cooperate," he said.

The 10 Association of Southeast Asian Nations (ASEAN) countries met Friday with their dialogue partners before Saturday's 16-nation East Asia Summit which US Secretary of State Hillary Clinton will also attend.

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