A Chinese navy official, who was not named, dismissed Vietnam's complaint as sheer fabrication, China's official Xinhua News Agency reported.
Vietnam, in its protest, said in the incident which occurred a week ago, Chinese ships chased and shot at a Vietnamese boat fishing in Vietnamese waters in the South China Sea's Paracel islands, setting the boat on fire. The islands are called Hoang Sa by Vietnam and Xisha Islands by China.
In a protest note, Vietnam demanded China investigate the incident and compensate Vietnamese fishermen, Vietnam News reported.
Vietnamese Foreign Ministry spokesman Luong Thanh Nghi said China's action violated his country's sovereignty over the Hoang Sa archipelago and was a serious breach of the agreement on the basic principles guiding the settlement of sea issues between Vietnam and China.
The Chinese navy official said four Vietnamese fishing boats illegally entered and fished in the territorial waters off China's Xisha Islands and that a crew aboard a Chinese patrolling vessel tried repeatedly to persuade the Vietnamese boats to leave by whistle blowing, shouting and hand flag guiding, but all the efforts failed, Xinhua reported.
The report said the Chinese vessel then fired two warning signal shells into the sky. The official was quoted as saying no weapons were fired and that no Vietnamese boat caught fire.
Claiming Xisha Islands are part of Chinese territory, the official said Vietnamese fishing boats have illegally entered China's territorial waters frequently in recent years.
Chinese Foreign Ministry spokesman Hong Lei also said China has indisputable sovereignty over the Xisha Islands and their adjacent waters, and that the Vietnamese fishing boat had entered the waters for "illegal fishing operations".
"According to confirmation by relevant parties, no harm was done to the Vietnamese ship at that time and place," Hong said.
The latest incident highlights China's growing assertive claims to much of the South China Sea, despite overlapping claims to some of the islands by neighboring countries including Vietnam. As free passage through the sea is critical for global commerce, China's claims have become a source of major international concern.
Responding to a question on the latest incident, State Department spokesman Patrick Ventrell expressed U.S. concerns, while noting more information was being sought.
"As a Pacific nation, the U.S. has a national interest in the maintenance of peace and stability, respect for international law, freedom of navigation, and unimpeded lawful commerce in the South China Sea," he said. "So we strongly oppose the threat or use of force or coercion by any claimant to advance its claims in the South China Sea."
Ventrell said such incidents underline the need for "a code of conduct, so that these can be dealt with in a transparent and rules-based way."