China is investigating four Japanese suspected of entering a military zone and illegally videotaping military targets, Xinhua news agency said, in the latest row to threaten ties between Asia's two biggest economies.
The two sides are already locked in an increasingly heated dispute triggered by Japan's detention of a Chinese fishing boat captain whose trawler collided earlier this month with a Japanese patrol boat in waters near islands both sides claim.
Top U.S. defense officials in Washington said they were closely monitoring the dispute and hoped political and diplomatic efforts underway would calm the situation.
"We are watching that tension very, very carefully," Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, told reporters at the Pentagon.
"Obviously we're very, very strongly in support of our ally in that region, Japan," Mullen told a joint news conference with Defense Secretary Robert Gates, who added, "And we would fulfill our alliance responsibilities."
Xinhua said on Thursday, "The state security authorities in Shijiazhuang, capital of Hebei, have taken measures against the four people according to law after receiving a report about their illegal activities." It gave no details.
This week, Chinese Premier Wen Jiabao threatened retaliatory steps against Japan unless it released the trawler captain, whom Tokyo accuses of ramming two Japanese coastguard ships.
Analysts say the trawler dispute is largely a row over sovereignty in an area with rich natural gas resources.
The islands are known as the Diaoyu islands in China and the Senkaku islands in Japan.
Emotions have run high over the issue in China, where memories of Japan's brutal World War II occupation stoke public anger. About 100 protesters in several Chinese cities on Saturday demanded Japan free the captain.
Japan urges calm
China has canceled diplomatic meetings and exchange visits by Japanese students to protest the detention.
A Japanese Foreign Ministry official confirmed four people were being investigated but did not give details.
"The prime minister and chief cabinet secretary have repeatedly said that we would like to address the relationship with China in a calm manner. This is the basic stance and it remains unchanged," Foreign Ministry deputy spokesman Hidenobu Sobashima said after the report of the investigation.
Xinhua did not say whether the four had been detained, but the wording it used implied that they were in custody. The report gave the name of only one of them, Sada Takahashi.
Japan's Kyodo news agency, quoting a source familiar with Sino-Japanese ties, said the four worked for a Japanese construction firm and were believed to have been visiting the scene to prepare for bidding on a project to dispose of chemical weapons abandoned in China by the Japanese military at the end of World War II.
Japanese Foreign Minister Seiji Maehara earlier brought up island tensions at a meeting with U.S. Secretary of State Hillary Clinton, State Department spokesman P.J. Crowley told reporters in New York.
"The secretary's response was just to encourage dialogue and hope that the issue can be resolved soon," Crowley said. Clinton and Maehara are in New York for the U.N. General Assembly's annual gathering of world leaders.
Earlier on Thursday, China's Commerce Ministry denied a New York Times report that China had banned shipments of rare earth minerals to Japan.
Both Chinese and Japanese rare earth traders contacted by Reuters said they were unaware of any ban, but that quotas for export of the minerals had already been used up, slowing trade.
Additional reporting by Andrew Quinn in New York; editing by Tim Pearce and Todd Eastham.