China told Japan and the United States on Tuesday that it hopes the Diaoyu Islands issue can be resolved peacefully but Beijing reserves the right to "take further action".
Top military officials made the comments during a meeting with US Defense Secretary Leon Panetta. The Pentagon chief is visiting China for the first time.
Defense Minister Liang Guanglie, during a joint news briefing with Panetta, said China urged Washington to honor its promise of not taking sides.
Panetta arrived in Beijing on Monday evening following a visit to Japan. His visit to Beijing, including talks with senior military and government leaders, has coincided with an eruption in tension between China and Japan over the islands, which have belonged to China for centuries.
Tokyo said it completed a "purchase" of the islands last week.
The move has sparked protests across China. Analysts said if Washington continues its stance by further encouraging Tokyo's provocations, Panetta's "mediation" will hardly ease the situation.
Vice-Chairman of the Central Military Commission Xu Caihou also told Panetta that China will not "concede half a step" and is "determined and capable" of preserving and protecting its territory and sovereignty.
He warned the international community, including the US, to be alert about emerging right-wing forces in Japan.
Panetta told Xu that Washington will not take sides over the islands and understands China's historical stance.
Washington and Beijing should foster contact and avoid misunderstanding that could spiral into confrontation, he said.
Standing next to Panetta, Liang told reporters that Japan should bear full responsibility for "heating up" the dispute.
"I want to make it clear that the Diaoyu Islands are China's inherent territory, which is evidenced by history and law. Secretary Panetta and I discussed the issue in our talks," Liang said.
He urged Tokyo to "correct its mistakes and come back to the right track of negotiations".
US: 'China will try to stabilize situation'
"That being said, we still hope for a peaceful and negotiated solution to this issue and we hope to work together and work well with the Japanese government in properly handling this dispute,'' Liang said.
The meetings in Beijing came just days after the Japanese government said Tokyo and Washington have agreed to put a second missile-defense radar system in Japan and reiterated that the islands are covered by the US-Japan security treaty.
Li Haidong, a professor from the Institute of International Relations with China Foreign Affairs University, said Panetta's remarks in Beijing and Tokyo are sometimes inconsistent.
China will try every means to stabilize the situation, said Lu Yin, a researcher at the National Defense University of the PLA.
"But the priority for Panetta is still China-US military ties.''
The two defense chiefs also touched on a wide range of issues as the US and China tried to find a way to improve their military relations, still recovering from a break due to US arms sales to Taiwan.
Panetta's trip to China provides an opportunity for Washington to expand cooperation and to explain the US strategy of rebalancing the Asia-Pacific region, Bonnie S. Glaser and Christopher K. Johnson, two senior researchers on Chinese studies said in an article on the website of the Center for Strategic and International Studies.
China's emphasis on military ties was underscored by a meeting with State Councilor Dai Bingguo on Tuesday and a scheduled meeting with Vice-President Xi Jinping on Wednesday. Panetta will also become the first US defense secretary to visit the home of the navy's North Sea fleet at Qingdao where he will visit warships and meet leaders of the fleet.