* China says ties with Japan badly damaged over boat row
* Japan says both sides should avoid fuelling nationalism
* Rivalry over territory, resources and military intentions (Recasts)
By Chisa Fujioka and Chris Buckley
TOKYO/BEIJING, Sept 21 (Reuters) - China snubbed Japanese Prime Minister Naoto Kan on Tuesday, saying a territorial dispute ruled out any meeting with Premier Wen Jiabao in New York this week and adding to the ire dividing Asia’s top two economies.
China’s confirmation that Wen will not meet Kan when they both attend a U.N. meeting marked another swipe at Tokyo after a Japanese court extended the detention of a Chinese skipper whose boat collided with two Japanese coastguard ships earlier this month near islands in the East China Sea claimed by both sides.
China has repeatedly demanded the captain’s release.
The Foreign Ministry stepped up the warnings and added the public snub of Japanese Prime Minister Kan, a step suggesting that it will take a while for diplomatic goodwill to return between the two neighbours, even after the boat case has passed.
“This issue has already seriously damaged China-Japan relations. The key to avoiding a further deterioration in the situation lies in Japan immediately and unconditionally releasing the man,” Foreign Ministry spokeswoman Jiang Yu told a regular news briefing in Beijing.
It would not be right, Jiang said, for Wen Jiabao to meet Kan in New York during a United Nations development summit.
“Given the current atmosphere, arranging a meeting clearly would be inappropriate,” she said.
The case of the boat captain has become a distillation of the distrust that threads through Sino-Japan relations, 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.
Many experts say neither country wants to risk their increasing trade flows through outright confrontation. But some said the boat case has re-opened nettlesome disputes put on hold as the two governments sought to end years of quarrels.
“This dispute is about problems between China and Japan that persisted even though both sides avoided or underplayed them for a while,” said Sun Cheng, an expert on Japan at the China University of Political Science and Law in Beijing.
“How bad relations get now partly depends on how long the boat captain is detained,” he said. “If he’s released soon, we’ll return to the status quo of before, but both sides have seen how even this small case became a major problem.”
Trade ties remain robust.
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, a jump of 34.5 percent over the same time last year, according to Japanese statistics.
But worries about a possible dip in the number of big-spending Chinese tourists to Japan in the wake of the dispute weighed on the share prices of department store operators such as Takashimaya.
A top Japanese government spokesman called for both sides to refrain from inflaming nationalism in the row over the islands, which China calls the Diaoyu and Japan calls Senkaku.
“What is most important is that government officials in Japan, China and other countries try not to fuel narrow-minded, extreme nationalism,” Japan’s Chief Cabinet Secretary Yoshito Sengoku told a news conference.
Japan’s Finance Minister Yoshihiko Noda also called for a solution that would leave business ties unaffected.
Japan’s National Tourism Organization, however, said it had made no change to its projection for the number of visitors from China to reach a record 1.5 million this year.
Japanese authorities have accused the Chinese captain of ramming a patrol ship and obstructing officers near the disputed, uninhabited islets in the East China Sea.
The two countries are also at odds over China’s exploration for natural gas in the East China Sea, and Beijing is also involved in territorial disputes with Southeast Asian nations in the South China Sea.
Japanese prosecutors have until Sept. 29 to decide whether to bring charges against the captain. ($1=85.69 yen) (Additional reporting by Tetsushi Kajimoto, Yoko Kubota, Elaine Lies and James Topham in Tokyo, and Ben Blanchard in Beijing; Editing by Miral Fahmy and Sanjeev Miglani)