Hu, left, and Fukuda had agreed to settle the dispute in May [Reuters]

The Kyodo news agency said an official announcement was expected as early as this week, while Japan's Nikkei business daily also reported that an agreement was being finalised.
 
China's foreign ministry made no comment on the reports on Monday while an official at Japan's ministry of economy, trade and industry said no deal had been struck.

"Talks are still going on and nothing has been finalised," the Japanese official was quoted as saying.
 
The reported agreement follows an ice-breaking summit in May between Yasuo Fukuda, Japan's prime minister, and Hu Jintao, the Chinese president, at which the two leaders agreed to work to settle the long-running dispute.

Japanese estimates have put net known reserves in the disputed fields at a relatively modest 180 million barrels of oil equivalent, but both countries say there might be a lot more oil or gas in the area.

The dispute covers more than just maritime gas rights, with matters of territory and sovereignty also in play.

The two sides have decided, however, to set aside territorial disputes for now and focus on joint gas field development, the Kyodo report said, quoting sources close to the discussions.

Tokyo has previously objected to Chinese development of the Chunxiao gas field close to the disputed boundary, and says drilling there could drain gas from what it says is its side of the line through a honeycomb of seabed rocks.

Kyodo said Beijing had agreed in the deal to let Japan invest in, and claim profits from, projects including Chunxiao, as well as in waters around other fields which China calls Duanqiao and Longjing.

Areas east of that line would also be targeted for future joint development, the agency added.

Taiwan 'incursion'

The Senkaku or Diaoyutai islands are claimed by Taiwan, China and Japan [EPA]

Meanwhile in a separate development Japan has condemned what it says was an incursion by a fleet of ships from Taiwan on another string of disputed islands.

Officials from the Japanese coast guard said the ships, which included nine patrol vessels, defied warnings and spent about two and a half hours near the islands, known to China as Diaoyutai and in Japan as Senkaku.

Officials say the boats were carrying Taiwanese activists protesting against a collision between a Japanese and Taiwanese ship last week.

The islands were seized by Japan in 1895 when it colonised Taiwan.

Tokyo continues to exert control over the islands, although Taiwan and China both claim sovereignty.

On Saturday Taiwan recalled its envoy to Japan in protest at Tokyo's handling of last week's collision.

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