By Chris Buckley and Kiyoshi Takenaka
BEIJING/TOKYO (Reuters) - China kept up its tough talk on Wednesday while Japan showed no sign of yielding in a dispute between the world's second and third biggest economies over uninhabited islets that has raised alarm in Washington and protests from Beijing to Taipei.
The long-running territorial dispute flared last month when Japan detained a group of Chinese activists who had landed on the islands, known as Senkaku in Japanese and Diaoyu in Chinese.
Tension increased on Tuesday when Japan, which controls the islands, said it had bought them from a private owner, ignoring warnings from China which responded by sending two patrol ships to reassert its claim, state media reported.
Chinese Foreign Ministry spokesman Hong Lei blamed Tokyo for the "grave condition" of China-Japan relations and warned that Japan must "pull back from the precipice".
"China will take necessary measures based on developments, and will staunchly protect national territorial integrity," he told a news conference, declining to be more specific.
Luo Zhaohui, the head of the Chinese Foreign Ministry's Asian department, met Shinsuke Sugiyama, Japan's visiting director-general of the Asian and Oceania Affairs, and vowed China would "never accept Japan's illegal occupation or so-called 'actual control' of the Diaoyu Islands".
But the ministry said both sides would "continue to keep in communication".
The Liberation Army Daily, the chief newspaper of China's military, rained scorn and warnings on Japan. Retired Major General Luo Yuan, a prominent foreign policy hawk, said China's forces were ready to defend its sovereignty.
Luo's comments echoed a warning from China's Ministry of Defense the previous day, and while the risk of military confrontation remained slim, the fiery words illustrate the domestic pressures for a tough response from Beijing.
"The Japanese government should not place its hopes in its so-called air and sea advantage. Chinese and Japanese forces have exchanged blows before," wrote Luo. "Nowadays, China's defense forces have achieved advances that nobody can belittle."
State television reported on Chinese military exercises that included amphibious landings.
Japanese Foreign Minister Koichiro Gemba rejected Chinese demands that Japan reverse its decision to buy the islands.
"There is no way we would reconsider the transfer, acquisition and possession of their ownership right," Japan's Kyodo news agency quoted Gemba as saying.
Japan's coastguard said it was monitoring the seas around the islands but had not seen any Chinese patrol vessels.
A coastguard official said foreign ships approaching Japan's waters would be warned and asked to change course. If they failed to comply and entered Japanese waters, the coastguard would try to force them to change course.
U.S. Assistant Secretary of State Kurt Campbell cautioned China and Japan on Tuesday against escalating the dispute, saying the stakes "could not be bigger" and tension could have global repercussions.
The row led to anti-Japanese protests in China last month and on Wednesday groups of people approached the heavily guarded Japanese Embassy in Beijing, carrying banners denouncing Japan and shouting slogans.
"Stamp Japan into the ground. Leave Japan with nothing. The whole world should boycott Japanese people and their products," protesters chanted.
Protestor Wang Shuo said the government should consider using force if needed. "Japan is hurting the Chinese people," he told reporters.
Small groups protested at the Japanese consulate in Shanghai, while in Hong Kong, about a dozen activists scuffled with police as they attempted to march into Japan's consulate.
In Taiwan, which also claims the islands, about 50 protesters gathered outside Japan's representative office, a day after Taiwan recalled its representative to Japan.
Shanghai sports authorities said they were dropping the name of a Japanese company that sponsors their municipal marathon, Toray Industries Inc, in light of the dispute.
But despite the angry words and gestures, economic ties between Japan and China are deeper than ever and both are believed to want to keep the feud from getting out of control.
(Additional reporting by Ben Blanchard in Beijing, Sisi Tang in Hong Kong, Jonathan Standing in Taipei and Tomasz Janowski in Tokyo; Writing by John Ruwitch; Editing by Robert Birsel)