* China demands apology, Japan refuses

* Row latest in a string dating back to World War Two (Adds comment from Okada, visit to four Japanese)

TOKYO/BEIJING Sept 25 (Reuters) - Japan refused to apologise on Saturday for detaining a Chinese boat captain, showing no signs of softening in a dispute between the two economic powers after Japan gave ground and released him.

The fishing trawler captain, Zhan Qixiong, flew out of Japan to the coastal Chinese city of Fuzhou on Saturday.

The release followed the detention of four Japanese nationals on suspicion of violating Chinese law regarding the protection of military facilities, though Japanese Chief Cabinet Secretary Yoshito Sengoku has denied a link between the two incidents.

Japanese diplomats met the four on Saturday, Kyodo news agency reported. They have been under residential surveillance, meaning they were likely restricted at a hotel or lodging, it quoted an official at the Japanese Embassy in Beijing as saying.

China’s Foreign Ministry said Beijing was angry at the detention of the captain, arrested by Japan over two weeks ago after his trawler collided with two Japanese patrol boats in waters near islands that both sides claim. It demanded an apology and compensation.

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For factbox on China-Japan ties: [ID:nTOE68J014]

For a factbox on frictions with China: [ID:nSGE68N028]

For Q+A on the gas dispute: [ID:nSGE68G07N]

For a company view on business ties: [ID:nSGE68L02G]

For a map of the disputed islands click:

link.reuters.com/dyv92p

For a graphic comparing Asia’s two largest economies:

link.reuters.com/tup64p

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China said its claim to the islands -- which it calls the Diaoyu and Japan calls the Senkaku -- was “indisputable”, but Japan did not agree.

“There is no territorial issue that needs to be resolved over the Senkaku,” Japan’s Foreign Ministry said in a statement. “China calling for apology or compensation is groundless and is absolutely not acceptable.”

Katsuya Okada, who was Japan’s foreign minister until a cabinet reshuffle on Sept. 17, criticized China for demanding an apology and compensation, Kyodo reported.

“Everybody knows that China is not a democratic country, but (the latest demand) will make that explicit,” Okada, who is now secretary-general of the ruling Democratic Party of Japan, was quoted as saying.

DIALOGUE

China’s statement had said that the two countries should solve their disputes through dialogue. Japanese Prime Minister Naoto Kan also said it was time for Asia’s two biggest economies to put relations back on a steady footing.

“I believe it is necessary for Japan and China to handle matters calmly,” he said in New York, where he attended the U.N. General Assembly.

The dispute has underscored the brittleness of ties long troubled by Chinese memories of Japanese wartime occupation and territorial disputes over parts of the East China Sea that could hold rich reserves of gas.

Some Japanese newspapers decried Zhan’s release as a backdown that would encourage Chinese assertiveness.

“There is a possibility that it has left an impression that Japan will cave in when pressured,” a leading daily, Asahi Shimbun, said in an editorial.

Sun Cheng, an expert on relations between the two countries at the China University of Political Science and Law in Beijing, said it would take time for relations to improve.

“China will want to keep up its case over the Diaoyu islands. Whether Japan actually apologies or gives compensation is not so much the point as making it clear that China won’t compromise on sovereignty,” he said.