Liang Guanglie held talks in Beijing with Panetta, who arrived in China after visiting Japan, even as the China-Japan dispute over a group of islands in the East China Sea grew more tense, raising global concerns.
The United States has not taken a stand on the issue and that was repeated by Panetta. He stressed the need for a diplomatic solution to the dispute over the small islands, known as Senkaku in Japan and Diaoyu in China.
Liang also stressed China's right to take "further actions," the state-run Xinhua news agency reported.
"We pay close attention to the development of the (Diaoyu Islands) issue and we reserve the right to take further actions, but we hope the issue will be properly resolved through peaceful ways and negotiations," the minister told reporters. "I want to make it clear that the Diaoyu Islands are China's inherent territory, which is evidenced by history and law. Secretary Panetta and I discussed the issue in our talks."
The Chinese defense chief blamed Japan for "heating up" the issue by purchasing the islands last week and nationalizing them, saying the purchase is illegal.
In Japan, Panetta urged Japan and China to resolve the dispute peacefully, noting the diplomatic row could result in a military clash, the Japan Times reported.
"It is extremely important that diplomatic means on both sides be used" to avoid further escalation, Panetta told a news conference in Tokyo.
In Beijing, Xinhua said Panetta, during his talks with Liang, said the goal "is to have the United States and China establish the most important bilateral relationship in the world" and that the key for that "is to establish strong military-to-military relationship."