Norway could shut China out of the Arctic Council if Beijing does not stop a campaign of diplomatic snubs imposed after the Nobel peace prize was awarded to Liu Xiaobo, a Norwegian newspaper has reported.

If confirmed, Oslo's move would mark a bold confrontation with the world's fastest rising economic power and highlight the growing importance of the Arctic, which is opening up for navigation and mineral exploitation as it melts due to global warming.

China's relations with Norway have been frosty since October 2010, when the Oslo-based Nobel committee announced that Liu, an imprisoned Chinese democracy activist, would be the next peace laureate.

Although the Norwegian government has stressed that the Nobel committee is independent, Beijing has punished its host nation by cutting political and human rights dialogues.

Until now, Norway has tried to use quiet diplomacy to ease the situation but, with little sign of progress, the Aftenposten, Norway's best selling newspaper, claims the government is preparing to up the stakes.

Citing an unnamed high-level diplomatic source, the paper said Norway would find it difficult to agree to China's application to be a permanent observer on the Arctic Council while the current situation persisted.

The Arctic Council is a forum for political discussions on the far north. It was established in 1989, originally to discuss measures to protect the Arctic environment, but has since expanded to work on scientific research, sustainable development and responses to emergencies.

Officially, the two governments have yet to comment on the issue.

"I can neither confirm nor deny this story, but I can say bilateral contacts between Norway and China are at a low level," Karsten Klepsvik, the senior Arctic official at the Norwegian Ministry of Foreign Affairs, said.

He said no decision had been reached about Norway's position on applications from several nations to join the Arctic Council, adding: "As of today, we have not had inter-agency consultation on applications, but we will have to do that in the near future."

China makes no secret of its interests in the Arctic. The country has had a permanent research base in Norway since 2004 and conducted four expeditions of the region, according to the website of the government's Chinese Arctic and Antarctic Administration.

It has also announced plans to build a new 8,000-tonne icebreaker by 2013 to join its current vessel, the Xuelong, or Snow Dragon, on some of the other three expeditions planned by 2015.

The potential is enormous. If the ice clears sufficiently for reliable summer navigation, ships could drastically cut the time needed to carry goods from China to Europe, and Chinese academics believe the Arctic could become the most important trade route in the world.

The region also has abundant resources, including fisheries, minerals, more than 10% of the world's undiscovered oil reserves and 30% of its undiscovered gas reserves.

Although much of this is within territory that has already been claimed, emerging economies such as China, India and Brazil seek influence over these opportunities through observers seats at the Arctic Council, which currently has eight full members – Norway, Canada, Russia, the US, Finland, Sweden, Iceland and Denmark.

Until now, it had been thought that Russia and Canada were the strongest opponents of expansion, while Denmark has been the most supportive of a greater role for China in the development of the Arctic.

The Danish ambassador to Beijing, Friis Arne Peterson, said in October that China has "natural and legitimate economic and scientific interests in the Arctic".

Denmark hopes to benefit from the shrinkage of Greenland ice with the extraction of major deposits of rare earths, uranium, iron ore, lead, oil and gems. China is likely to be a key customer for these resources.