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* Japan finalises $26 mln buy of disputed islands

* China, Taiwan issue protests, warnings

* Japan at pains to assure China deal not meant as

provocation

* Dispute flare-up already seen affecting business.

By Kiyoshi Takenaka

TOKYO, Sept 11 (Reuters) – Japan brushed off warnings by

China and bought a group of islands on Tuesday that both claim,

in a growing dispute that threatens ties between Asia’s two

biggest economies.

Chinese official media said Beijing had sent two patrol

ships to waters surrounding the islands to reassert its claim

and accused Japan of “playing with fire” over the long-simmering

row.

Tokyo insisted that it had only peaceful intentions in

making the 2.05 billion yen ($26.18 million) purchase of three

uninhabited islands in the East China Sea, until now leased by

the government from a Japanese family that has owned them since

early 1970s.

Foreign Minister Koichiro Gemba repeated Japan’s standard

line that the purchase served “peaceful and stable maintenance

of the islands.”

“We cannot damage the stable development of the Japan-China

relationship because of that issue. Both nations need to act

calmly and from a broad perspective,” he told reporters after a

cabinet meeting approved the transaction.

The Japanese Coast Guard will administer the islands,

called Senkaku in Japan and Diaoyu in China, which are near rich

fishing grounds and potentially huge maritime gas fields.

The long-running territorial dispute flared again last month

after Japan detained a group of Chinese activists who had landed

on the islands.

But the row appears to be having an economic impact, with a

Chinese official saying Japanese car sales in the world’s

biggest auto market may have been hit.

Chinese President Hu Jintao’s warned at the weekend against

the purchase, which he called “illegal”. On Tuesday Taiwan,

which also claims the territory recalled its representative to

Japan in protest against the deal.

The news triggered small-scale protests in front of the

tightly-guarded Japanese embassy in Beijing. Microbloggers on

China’s popular Twitter-like service Sina Weibo also reported

small anti-Japanese protests in the eastern city of Weihai and

the southwestern city of Chongqing.

Japanese Prime Minister Yoshihiko Noda, in an address to

senior military officers, made no direct reference to the

islands dispute, but pointed to China’s growing military clout

as one of challenges Japan had to contend with.

“We have North Korea launching missiles under the name of

satellites and conducting a nuclear programme, China expanding

its military might and continuing vigorous activities in

regional waters and Russia also boosting its activities in the

Far East,” Noda said.

The foreign ministry said it is sending its Asia department

chief to Beijing on Tuesday for talks to “avoid misunderstanding

and lack of explanation on the issue.”

The government bought three out of five islets that it has

been leasing from the Kurihara family, which itself bought the

islands in 1972 from another Japanese family that had controlled

them since the 1890s. The government has owned one of the

remaining islets and continues to lease one from the Kurihara

family.

Noda floated the plan to buy the islets in July to head off

what appeared to be a much more provocative bid by Tokyo

governor Shintaro Ishihara, a harsh critic of China, to purchase

them and make the islands available for development.

But Beijing, at least in public, has repeatedly warned

against the government purchase.

On Tuesday, People’s Liberation Army Daily said in a

commentary that Japan was playing with fire. Xinhua news agency

reported two patrol vessels were heading into waters surrounding

the islands.

The Japanese Coast Guard could not confirm the report.

Relations between the Asian powers, plagued by Japan’s

wartime occupation of parts of China and present rivalry over

regional clout, have been difficult for years. But economic ties

are stronger than ever and both countries are believed to want

to keep the feud from spiralling out of control.