China and Japan have frequently clashed over the unpopulated islands, known as the Diaoyu in China, and the Senkaku in Japan, whose waters are thought to contain substantial natural-gas reserves, but this year's row has graver implications for both -- and the U. S.-- as China is rapidly acquiring the naval power to enforce its claims.

Beijing also threatened "strong countermeasures" following Japan's decision, which could provoke fresh nationalist protests across China this week and potentially damage commercial relations between the world's second and third largest economies.

China suspended high-level government exchanges with Japan, significantly escalating the two countries' worst dispute in five years, after Japanese authorities extended the detention of the captain of a Chinese fishing boat detained near disputed islands in the East China Sea.

It is being closely watched by many other Asian countries -- including India, Vietnam and the Philippines -- which have territorial disputes with China, and which have concerns about China's expanding naval power.

The decision was all the more provocative in China's eyes as it followed small demonstrations outside Japanese diplomatic missions in several Chinese cities on Saturday -- the anniversary of Japan's invasion of China in 1931.

China responded on Sunday by suspending ministerial and provincial-level bilateral exchanges, halting talks on increasing flights between the two countries and postponing a meeting about coal, according to China's state -- run Xinhua news agency.