By Ben Blanchard and Chisa Fujioka
BEIJING/TOKYO | Wed Sep 22, 2010 5:55am EDT

(Reuters) - Chinese Premier Wen Jiabao threatened more retaliation against Japan unless it releases a trawler captain whom Tokyo accuses of deliberately colliding with two Japanese coastguard ships near disputed islands. Japanese leaders urged calm but showed no sign of backing down on an issue one analyst said is largely a row over energy resources in sea around the islands that both claim. In the first comments by a senior Chinese leader on the issue, he told a meeting of ethnic Chinese in New York on Tuesday that the skipper must be set free unconditionally.

"The Japanese side has paid no heed to China's numerous serious representations, and so China cannot but take necessary countermeasures," he said, in comments carried on the Foreign Ministry's website (www.mfa.gov.cn). "If Japan acts wilfully despite advice to the contrary, China will take further actions, and Japan must accept full responsibility for all the severe consequences," he added, calling the islands "China's sacred territory."

Beijing has suspended high-level contacts with Japan over the issue and postponed talks on increasing flights between Asia's top economies which have close business and trade ties. Executives say they do not see the spat affecting them. But the case has become a distillation of the distrust that threads through relations between Asia's two biggest economies, drawing in territorial disputes, Chinese bitterness over wartime occupation, Tokyo's anxieties about Chinese regional sway, and Japanese unease as China rises in global GDP rankings. Japan's Chief Cabinet Secretary, Yoshito Sengoku, asked to comment on Wen's remarks, said: "It would be good to have high-level talks as soon as possible, on issues including broad, strategic matters."

China has already said Wen would snub Japanese Prime Minister Naoto Kan, also in New York for a U.N. summit. Kan told reporters he had no plans to ask for a meeting there. "I'd like people in each position to act calmly." The row with China is turning into a test of the diplomatic skills of Kan, fresh from fending off a party leadership challenge and struggling with a raft of problems from a strong yen and weak economy to a divided parliament.

NEITHER WANTS TO RISK TRADE

Analysts say neither country wants to risk their growing trade flows with outright confrontation. But the boat case has re-opened disputes put on hold as the two governments sought to end decades of quarrels. The two are also at odds over China's exploration for natural gas in the East China Sea. And Beijing has territorial disputes with southeast Asian nations in the South China Sea. "This dispute is a conflict over energy resources. The islands themselves are actually not so important, but the heart of the issue lies in the natural resources in the nearby waters," said Shigeki Sakamoto, professor of law at Kobe University.

A group of activists set out from Hong Kong for the islands on Wednesday, ostensibly to assert China's fishing rights around the East China Sea islands. China has been Japan's biggest trading partner since 2009 and bilateral trade reached 12.6 trillion yen ($147 billion) in the January-June period, up by a third. Trade ties remain robust, though state media has reported on a fall-off in Chinese tourists to Japan. Japanese authorities have accused the Chinese captain of colliding with two patrol ships and obstructing officers near the disputed, uninhabited islets in the East China Sea, called Diaoyu in China and Senkaku in Japan.

Japanese prosecutors have until September 29 to decide whether to bring charges against the captain. Japan's Asahi Shimbun paper said prosecutors are considering indicting him for obstructing coast guard officials.

(Additional reporting by Yoko Kubota, Kiyoshi Takenaka, Linda Sieg and Michael Watson in Tokyo, and James Pomfret in Hong Kong, editing by Jonathan Thatcher)