The United States urged Japan and China on Monday to settle their increasingly angry dispute over islands claimed by both sides, saying it was in everyone's interests to have good relations between Asia two biggest economies.
The mounting tension over ownership of the islands in the East China Sea triggered protests in a number of cities across China at the weekend and warnings from Beijing officials that it could hurt Japan's trade with its biggest export market.
"Obviously we're concerned by the demonstrations (in China) and we're concerned by the conflict that is taking place over the Senkaku islands, and the message that I have tried to convey is a message that we have to urge calm and restraint on all sides," Panetta told reporters.
China and Japan both claim the islands, called Senkaku by Japan and Diaoyu by China, which lie in waters believed to be rich in natural gas.
The intensity of the dispute, which has been dragging on for years, suddenly increased last week after the Japanese government bought some of the islands from a private Japanese owner.
Japanese Foreign Minister Koichiro Gemba earlier told reporters that Tokyo and Washington agreed that the disputed islands were covered by a U.S.-Japan security treaty.
Panetta said that while his government stood by its obligations under the treaty with Japan, it did not take any side over who had sovereignty over the islands.
"...the United States, as a matter of policy, does not take a position with regard to competing sovereignty claims. Having said that, we expect that these issues will be resolved peacefully and although we understand the differences here with regard to jurisdiction, it is extremely important that diplomatic means on both sides be used to try to constructively resolve these issues," he said.
"It is in everybody's interest - it is in everybody's interest - for Japan and China to maintain good relations and to find a way to avoid further escalation."
Panetta also said that he had agreed with Japan to locate a second missile defence radar on Japanese territory to protect against a ballistic missile threat from North Korea.
North Korea, which has long been trying to build a nuclear arsenal, has also been working on a ballistic missile which would be able to reach the U.S. mainland. However, its long-range rocket tests have to date all failed.
"(The radar) will enhance the alliance's ability to defend Japan, our forward deployed forces and the U.S. homeland from a ballistic missile threat posed by North Korea," Panetta said.