Japanese companies have closed shop in China after a weekend of violent protests over competing claims to a group of islands in the East China Sea.
The US has also warned of a danger of armed conflict and urged both sides to exercise restraint.
The closures came after people took to the streets in more than 70 Chinese cities to protest the Japanese government's purchase last week of the Senkaku islands, known as the Diaoyu in China, from their private Japanese owners.
China reacted by sending marine patrol ships to Japanese-claimed waters around the islands. On Monday, the Kyodo news agency, citing the online edition of the Central People's Broadcasting Station in China, said that as many as 1 000 Chinese fishing boats had set sail on Sunday and would arrive in waters off the Senkakus later in the day.
The diplomatic row has spilled over into the countries' close economic ties, amid warnings by the US Secretary of Defence Leon Panetta that the spat could deteriorate into armed conflict.
"Obviously we're concerned by the demonstrations and we're concerned by the conflict that is taking place over the Senkaku islands, and the message that I have tried to convey is a message that we have to urge calm and restraint on all sides," he told reporters before leaving Tokyo for Beijing earlier on Monday.
While it sanctioned the demonstrations, the Chinese government on Monday attempted to dampen anti-Japanese sentiment, removing provocative online comments and photographs of the protests, and threatening to arrest anyone found to have broken the law.
Chinese authorities said 10 people had been arrested for attacking cars or vandalising shops, while arrests were also reported over an arson attack on a Japanese electronics factory and car dealership.
In some of the worst of the weekend's protests, demonstrators hurled bottles and other items at the Japanese embassy in Beijing and attacked Japanese restaurants and other businesses in at least five cities.
Toyota and Honda said arsonists had badly damaged their dealerships in Qingdao in eastern China, while Panasonic said one of its plants had been set alight. The electronics giant said the factory would remain closed through Tuesday, when China marks the anniversary of the start of Japan's occupation of parts of the country.
Canon said it would also close three of its four factories in China for the next two days, while All Nippon Airways reported a spike in cancellations on flights from China to Japan.
Meanwhile, Japan's Fast Retailing said would close 19 of its Uniqlo clothing stores in China on Tuesday as it expects the anti-Japan demonstrations to escalate. Asia's largest apparel retailer shut seven stores on Monday.
In the southern city of Shenzhen, police fired teargas and turned water cannon and pepper spray on thousands of protesters attempting to occupy a street.
On Sunday, Panetta said he was concerned that other countries, including the US, could be dragged into any conflict over the islands.
Washington has declined to take sides in the Senkaku row, but acknowledges that under the US-Japan security treaty it is required to come to its ally's aid if it is attacked.
Japan's Foreign Minister Koichiro Gemba who met Panetta in Tokyo on Monday, said it was "mutually understood between Japan and the United States that [the Senkakus] are covered by the treaty".
Panetta said the US did not take a position on the sovereignty claims, but added: "Having said that, we expect that these issues will be resolved peacefully and although we understand the differences here with regard to jurisdiction, it is extremely important that diplomatic means on both sides be used to try to constructively resolve these issues.
"It is in everybody's interest for Japan and China to maintain good relations and to find a way to avoid further escalation."
The Japanese Prime Minister Yoshihiko Noda called on the Chinese authorities to ensure the safety of Japanese citizens and businesses. "Regrettably, this is a problem concerning the safety of Japanese nationals and Japan-affiliated companies," he told broadcaster NHK. "I would like to urge the Chinese government to protect their safety."
China described Japan's decision to buy three of the uninhabited islets, which are thought to be surrounded by huge deposits of natural gas, as a violation of its sovereignty.
Japan says the islands have been an integral part of its territory since the late 19th century, claiming that China had only shown an interest in them after studies pointed to the presence of potentially valuable natural resources nearby.
Calls for boycott
Chinese state media and online activists united in calling for a boycott of Japanese goods, while Chinese tourism authorities ordered travel agents to cancel package tours to Japan during a week-long national holiday next month.
One newspaper warned Japan that it could face another "lost decade" of economic stagnation if trade ties are affected. China replaced Japan as the world's second-biggest economy in 2010, but analysts said that both sides would suffer from a prolonged trade spat.
China is Japan's single biggest trading partner and bilateral trade was worth a record $345-billion last year.
"How could it be that Japan wants another lost decade, and could even be prepared to go back by two decades," said a front-page editorial in the overseas edition of the People's Daily, a Communist party newspaper.
The paper said China had always exercised caution over "playing the economic card", adding "but in struggles concerning territorial sovereignty, if Japan continues its provocations, then China will take up the battle".
Other recent outbreaks of anti-Japanese sentiment, in 2005 and 2010, ended with short-lived protests and minor disruption to trade. – © Guardian News and Media 2012