Hopes that Asia's big powers would begin to heal their two-month feud, centred on resource-rich East China Sea islands, dominated the talks in Vietnam's capital where the row erupted again Friday.

The mood roller-coastered, with Japan saying their foreign ministers had made a promising start with an agreement to improve ties, but China then angrily accusing its rival of making false statements over the islands.

Hopes for a formal meeting between Japan's Prime Minister Naoto Kan and Chinese Premier Wen Jiabao evaporated, but the pair made some progress in brief discussions on the East Asia Summit sidelines Saturday, Japan said.

"They will continue making efforts on promoting a strategic, mutually beneficial relationship," Japan's deputy chief cabinet secretary Tetsuro Fukuyama told reporters.

"They also said that they will have an opportunity to talk longer in future," he said. "They shared an understanding that it was disappointing the bilateral summit did not take place this time."

Japan and China have been feuding since the September 8 arrest of a Chinese trawler captain after a collision with Japanese coastguard vessels near the disputed East China Sea island chain.

China on Friday also hit out at Clinton's remarks this week that the islands, known as the Diaoyus in China and Senkakus in Japan, fall within the scope of the US-Japan security alliance.

However, Clinton told the summit Saturday that maritime rows should be settled by international law, in defiance of China's call to handle them directly with its neighbours.

"The United States has a national interest in the freedom of navigation and unimpeded lawful commerce," she said, repeating a US stand in the presence of China's premier Wen.

"And when disputes arise over maritime territory, we are committed to resolving them peacefully based on customary international law."

But she also sounded a softer note, saying she was encouraged by China's steps to enter into discussions with the Southeast Asian bloc on a legally enforceable code of conduct on overlapping claims in the South China Sea.

China's Foreign Minister Yang Jiechi responded by telling Clinton to be "cautious" when discussing the maritime issue, to "respect China's sovereignty and territorial integrity, and to not make irresponsible remarks".

Clinton however said she had yielded assurances from Yang on China's exports of rare earth minerals, which Beijing has been accused of restricting in the aftermath of the row with Japan.

"Foreign Minister Yang clarified that China has no intention of withholding these minerals from the market. He said he wanted to make that very clear," she said.

Japanese leader Kan sought to play down the diplomatic drama, saying that the current problems between Asia's top two economies were not "so critical" compared to the turbulence that has marked their long history.

A US State Department official said Clinton had also told Yang that a return to normal relations was in everyone's best interests and that she wanted to see "steps to rebuild trust and confidence".

The US proposed hosting a three-way ministerial meeting to broach troublesome issues, but officials said that the diplomatic temperature would first need to subside.

The East Asia Summit is a forum for dialogue on strategic, political and economic issues involving the 10-member Southeast Asian bloc as well as Australia, China, India, Japan, South Korea and New Zealand.

There was also discussion in Hanoi on the "currency wars" and resulting heavy capital inflows that risk destabilising emerging Asian economies.

The Asian Development Bank chief warned here Saturday that emerging economies must carefully manage the inflow of hot money, and avoid remedies that could create destabilising "distortions".

The United States and Russia were formally invited to join the 16 members of the East Asia Summit Saturday, in what analysts say is a blow to Chinese attempts to diminish US influence in the region.

earlier related report
Asian summit held amid China-Japan feud
Hanoi (AFP) Oct 30, 2010 - A deepening feud between China and Japan threatens to overshadow an Asian summit Saturday after Beijing accused its rival of making false comments and hopes for talks between their leaders evaporated.

The East Asia Summit is a forum for dialogue on strategic, political and economic issues involving the 10 Association of Southeast Asian Nations (ASEAN) members as well as Australia, China, India, Japan, South Korea and New Zealand.

US Secretary of State Hillary Clinton and Russian Foreign Minister Sergei Lavrov will be invited to join the 16-nation annual summit in Hanoi against a background of simmering tensions between China and Japan.

Asia's two big powers have been embroiled in their worst diplomatic row in years, sparked by a territorial dispute that has escalated into protests, scrapped meetings and allegations China is freezing exports of vital minerals.

All eyes in Vietnam's capital have been on the sparring match and whether the rival premiers, China's Wen Jiabao and Japan's Naoto Kan, would hold highly anticipated direct talks.

The prospects appeared good after Japanese Foreign Minister Seiji Maehara met with his China counterpart early Friday, saying they had agreed to improve ties and that the two-way summit would "probably take place in Hanoi".

But there was confusion later as the Japanese delegation announced the leaders' meeting would take place, and then shortly afterwards retracted its statement.

China's assistant foreign affairs minister Hu Zhengyue then used extremely strong terms to condemn Japan's behaviour.

"Japanese diplomatic authorities have partnered with other nations and stepped up the heat on the Diaoyu island issue," he said, referring to disputed East China Sea islands known as the Senkaku in Japan.

He said the comments had "violated China's sovereignty and territorial integrity."

"The Japanese moves, which is clear for everyone to see, have ruined the needed atmosphere for a meeting between the two leaders. Japan should take full responsibility for the result."

China also voiced strong dissatisfaction over remarks by Clinton that the disputed islands fall within the scope of the US-Japan security alliance.

"The Chinese government and people will never accept any word or deed that includes the Diaoyu (Senkaku) islands within the scope of the US-Japan Treaty of Mutual Cooperation and Security," foreign ministry spokesman Ma Zhaoxu said in a statement on the ministry website.

The neighbours have been feuding since the September 8 arrest of a Chinese trawler captain after a collision with Japanese coastguard vessels near the disputed island chain in the resource-rich East China Sea.

Kan's spokesman Noriyuki Shikata said there was no reason for "heightened tensions... between the two countries."

"I don't see the kind of basis for that kind of reaction," he told reporters in Hanoi. "We are ready to engage in dialogue."

The United States called on China and Japan to hold talks to ease tensions.

"We want China and Japan to sit down, to have dialogue and work through the issues" surrounding disputed islands and a recent sea collision, State Department spokesman Philip Crowley told reporters in Washington.

"We would hope that both countries will take affirmative steps to de-escalate tensions around this issue and that will create the conditions for a meaningful dialogue," Crowley said.

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