Chinese Premier Wen Jiabao has threatened 'further actions' if Japan fails immediately to release a trawler captain.
Japan in turn has called for talks to resolve the feud, but has rejected China's territorial claim to disputed islets near where the Chinese skipper was apprehended by Japanese coast guard crews two weeks ago.
China has repeatedly demanded that detained skipper Zhan Qixiong be released, summoning Japan's ambassador six times.
It has also called off several official visits and planned negotiations and has cancelled cultural events.
China further announced on Sunday that it had suspended high-level exchanges after Japan decided to extend Zhan's detention until 29 September, when he must be either indicted or released.
'I strongly urge the Japanese side to release the skipper immediately and unconditionally', Chinese Premier Wen Jiabao said in New York, according to the official Xinhua news agency.
'If Japan clings to its mistake, China will take further actions, and the Japanese side shall bear all the consequences that arise', he said, urging Tokyo to 'correct its mistakes to bring relations back on track'.
Japanese Foreign Minister Seiji Maehara dismissed China's longstanding claim over the rocky islets, which lie near possible oil and gas fields in the East China Sea.
'There is no territorial issue', he said.
However, Japan today said it was ready for dialogue.
'It would be good to hold high-level talks, including a comprehensive and strategic dialogue, as quickly as possible', Chief Cabinet Secretary Yoshito Sengoku told a news conference in Tokyo.
China had yesterday dashed any hope of fence-mending talks between the two countries, with a foreign ministry spokeswoman saying the atmosphere was 'not suitable for such a meeting'.
'The issue has severely hurt bilateral relations', she told reporters.
The dispute has caused anger among the Chinese public, which is still ambivalent towards Japan after its forces occupied swathes of northern China before and during WWII.
China's Wen Jiabao and Japanese Prime Minister Naoto Kan are both due to hold talks at the UN this week with US President Barack Obama.
