New York (CNN) -- The Obama administration is walking a tightrope over a diplomatic dispute between China and Japan, as it seeks to curb aggressive Chinese behavior on the high seas while not alienating the Asian giant.
The latest controversy over the simmering dispute erupted when Japanese patrol officers arrested the captain and crew of a Chinese fishing boat earlier this month near disputed islands -- known as Diaoyu in China and Senkaku in Japan.
The crew was released. But the Chinese captain remains in custody, accused of ramming two Japanese boats with his vessel.
On Friday, Japan said it will release the captain, but did not offer a time frame.
The economic repercussions have been immediate. The Chinese government cut off high-level talks with Japan on coal and increased commercial flights between the countries.
The dispute also threatens planned talks on a 2008 agreement to jointly develop gas fields located near the disputed islands and in other parts of the East China Sea.
While the United States hasn't taken an official position on the claims to the islands, they are considered part of Japan based on U.S.-Japan security treaties.
Defense Secretary Robert Gates told reporters Thursday the United States "would fulfill our alliance responsibility" if the conflict escalated.
Though analysts don't think the current tension will escalate and draw in the U.S. military treaty obligations, the agreements add murkiness to an already muddy territorial dispute.
It also puts the United States in the uncomfortable position of trying to stand by its closest ally in the region, Japan, while not irritating China, a growing power that the U.S. needs for a variety of political and economic issues.
"We're watching that tension very, very carefully," Navy Adm. Mike Mullen, chairman of the Joint Chiefs of Staff told reporters at the Pentagon ."Obviously we're very, very strongly in support of our ally in that region, Japan.
Both China and Japan have raised the issue with Secretary of State Hillary Clinton during meetings on the sidelines of the United Nations General Assembly. On Thursday, during talks with Japanese Foreign Minister Seiji Maehara, Clinton urged Japan to resolve the dispute through dialogue, State Department Spokesman P.J. Crowley said.
The United States urges "both sides to work aggressively to resolve" their differences "as quickly as possible," Crowley told reporters in New York after the meeting.
President Barack Obama's special assistant, Jeffrey Bader, said while the U.S. government was not playing a mediating role, it was talking with both sides about the need to resolve the dispute "soon."
"These two countries have a history with each and there are nationalist sentiments in both countries that can be stirred up and could be a problem should it stagnate," he said. "We want to see China and Japan have a good relationship, a relationship with reduced friction."
Bader said the issue did not come up during President Obama's meeting Thursday with Chinese Premier Wen Jiabao, where the agenda was dominated by the global economy.
After the meeting Obama called China an "outstanding partner" and said its work is "absolutely critical" in resolving the financial crisis. Obama met later Thursday with Japanese Prime Minister Naoto Kan.
The China-Japan dispute parallel's U.S. efforts to curb Chinese claims for territory in the South China Sea, out of fear the increasingly powerful Chinese military could seek to dominate Asian waters.
At a regional security forum in Vietnam in July, Secretary Clinton waded into thorny territorial disputes in the area, saying Washington was concerned competing claims to the territory undermined international maritime law and commerce.
While China has sought to negotiate territorial rights to the South China Sea individually with countries in the region, the nations of the Association of Southeast Asian Nations (ASEAN) and the United States have called for a collaborative resolution. China maintains the disputes should not be "internationalized."
In addition to rich areas for fishing, the islands in the South China Sea are believed to have large oil and gas reserves and surround busy sea lanes shuttling resources for China's fast-growing economy. Beijing has warned America that foreign interference in the waters off its southeastern coast constitute an affront on its sovereignty.
Obama is meeting Friday with the leaders of Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia and Laos. Along with Indonesia and Malaysia, they make up the ASEAN nations.
Bader said the United States hoped the leaders would endorse comments Clinton made in Vietnam, including recognizing the fact that peaceful resolution of the South China Sea issue was "in the interests of the entire international community," including the U.S.
Asian diplomats told CNN the United States wanted the ASEAN leaders to issue a communique after the meeting echoing Clinton's strong stand that the South China Sea issue was in the interests of the U.S., but the leaders do not want to do so, fearing it will anger China. Beijing has been working through some ASEAN countries it has better relations with to soften the document, the sources said.
"The fact so many ASEAN leaders came to New York to meet with President Obama is evidence we need America," one senior ASEAN diplomat said. "We don't need a communique to say this. That is not the Asian way."