U.S. Defence Secretary Leon Panetta called on China and Japan to exercise "calm and restraint" in resolving their ongoing dispute over a group of islets in the East China Sea.

"We expect that these issues will be resolved peacefully . . . and it is extremely important that diplomatic means on both sides be used to try to constructively resolve these issues," Mr Panetta was reported by Reuters as saying in Tokyo on Monday.

The U.S. defence chief is visiting Japan partly to assure the Japanese government that Washington will honour its obligation under the U.S.-Japan security treaty, which officials of both nations confirmed cover Tokyo's current territorial problems with Beijing.

Japan claims sovereign ownership of Senkayu Islands and formalised its control of the area by nationalising it last week.

Angered by the move, Beijing warned on Monday, through the country's official newspaper The People's Daily, that "if Japan continues its provocations, then China will take up the battle."

Mr Panetta, however, reminded the two countries, the biggest economies in the Asia Pacific region, "it is in everybody's interest for Japan and China to maintain good relations and to find a way to avoid further escalation."

Washington, he added, remains neutral on the matter and "as a matter of policy, does not take a position with regard to competing sovereignty claims."

Mr Panetta stressed too that his government's new agreement with Tokyo to locate a second missile defence radar within Japan was wholly meant to deter perceived threats from North Korea and was in no way related to the worsening tension between Japan and China.

In a news briefing with reporters in the Japanese capital today, the U.S. defence secretary reiterated too that America's core message at the moment is "to urge calm and restraint on all sides."

He made his calls as Beijing appears to be running out of patience over the nationalisation initiative of Tokyo over a territory that the former calls Diaoyu Islands.

Through its official mouthpiece, The People's Daily, China branded Japan's decision last week as "not only a futile and dangerous farce but an open challenge to China's territorial sovereignty and national dignity."

"We advise the Japanese government not to misjudge the situation. The Chinese people will never allow any country to seize even half inch of Chinese territory," the newspaper said on Monday.

Apart from brandishing its new-found economic might, the Chinese daily warned that "the Chinese government and armed force's resolution and will of defending the national territorial sovereignty are strong and unchangeable."

The economic component of the territorial dispute, analysts said, cannot be brushed aside by Japan as China now represents one of the former's biggest export market and sanctions coming from Beijing could further bruise Tokyo's already struggling economy.

Already, the territorial row's early impacts were being felt in Japan, with Japanese firms in China admitting that production activities have been hampered by the dispute.

Reuters reported too that tourists from China have commenced cancelling or postponing booked flights bound for Japanese destinations.

These signs represent the bitter fruit that Japan must swallow, The People's Daily said, "if the Japanese government continues to act arbitrarily."