Japanese Minister for Foreign Affairs Koichiro Gemba, who met with his Chinese counterpart Yang Jiechi on the sidelines of the U.N. General Assembly, described the meeting's atmosphere as "severe," Kyodo News reported.
He said he urged China to exercise restraint over the island dispute, which took on a new dimension after Sept. 11 when the Japanese government nationalized the uninhabited islands, called Senkaku in Japan and Diaoyu in China.
It was the first ministerial meeting between Gemba and Yang as bilateral relations have plunged to their lowest level in years, Kyodo said. The issue has triggered widespread and violent protests in Chinese cities and Beijing continues to issue harshly worded statements to assert its claim.
The islands, under Japanese control for decades, have assumed importance since recent reports indicated the islands and the waters around them are rich in natural resources. Taiwan also claims the islands.
Kyodo quoted Japanese officials that the government's purchase of the islands from a Japanese businessman is intended to manage Senkaku as a peaceful and stable site.
China, retaliating against Japan's "illegal" moves, has put off this week's events in Beijing to mark the 40th anniversary of the normalization of bilateral relations. There have been a number of warnings from Beijing, including saying the island issue could affect bilateral trade, estimated at about $340 billion annually.
China's official Xinhua news agency quoted Yang as telling Gemba that despite China's stern representations and strong opposition, the Japanese side insisted on implementing the so-called "nationalization," which, Xinhua said, is a violation of China's territorial integrity and sovereignty.
"The Chinese side will by no means tolerate any unilateral actions by the Japanese side on the Diaoyu Islands. China will continue to take firm measures to safeguard its territorial integrity and sovereignty," Yang said.
Xinhua reported both sides promised they would maintain consultations on bilateral relations.
On Tuesday in New York, Japanese Prime Minister Yoshihiko Noda, after his meeting with Indonesian President Susilo Bambang Yudhoyono, said Japan will maintain communication with China as both countries are responsible for maintaining peace and stability in the region, Kyodo said, quoting a Japanese official.
Separately, Xinhua quoted experts that the dispute has taken a toll on bilateral economic and trade ties.
The report said Chinese tourists planning to travel to Japan have been bogged down as major Chinese travel agencies have halted Japan business. It said Japan's major automakers have shut down several factories in China in the wake of the violent anti-Japanese protests.
Xinhua said experts estimate the automakers' losses to hit at least $250 million and that the month-on-month sales of Japanese auto products in China could be down 50 percent this month.
Beijing retailers told Xinhua that Japanese electronic appliance companies have been hit because of Chinese consumers' boycott of Japanese products.
"China will lose less than Japan if economic and trade wars have to be our choice ultimately," Mei Xinyu at the International Trade and Economic Cooperation Institution under China's Ministry of Commerce told Xinhua.