Japanese news reports said that the two governments had reached a final solution after exhaustive talks and were expected to announce an agreement as soon as this week.

In the reported solution, Japan would invest in a gas field that is controversially operated by Beijing in the East China Sea.

The top spokesman for the Japanese government said that talks were in their last stages.

"I know that the negotiations are now about the final details," Chief Cabinet Secretary Nobutaka Machimura told reporters, without elaborating.

A spokeswoman for China's foreign ministry confirmed that the two sides had made "important progress" in their discussions.

Ending the row would remove a major obstacle in relations between Japan and China, which have been working to ease longstanding political tensions.

China started drilling in the area in 2003, even though Japan believed that the gas fields crossed the median line. Japan has previously said that Beijing may be siphoning off what Tokyo considers to be its own gas reserves.

In 2004, amid sour political relations, a Chinese nuclear submarine intruded into Japan waters near the gas fields, setting off a two-day chase on the high seas.

Japanese media reports said the two nations had reached final agreement on how and where to conduct joint gas exploration in the disputed waters and about the Japanese investment in the project.

Working-level officials were discussing terms of the investment this week, the Asahi Shimbun reported in its evening edition.

The two sides have disputed over where to draw the line for their exclusive economic zones, but they have decided to put the issue aside for the time being to reach the deal, the Mainichi Shimbun said.

Through the investment, Japan hopes to secure the right to energy from the field, the Nikkei business newspaper said, without identifying its sources.

"This deal would pave a way for the final agreement of the gas field dispute," said the business daily.

The energy row has fuelled tensions between the neighbouring Asian giants, whose relations have been frequently marred by disputes over Japan's past aggression in China.

The countries are among the world's top energy importers as they fuel their massive economies. Japan, despite having the world's second largest economy, is almost entirely dependent on imports for its gas and oil needs.

The two countries had failed to meet a deadline of resolving the gas row in time for Chinese President Hu Jintao's conciliatory visit to Tokyo in May. Hu was only the second Chinese president ever to visit Japan.

China refused all high-level dialogue with Japan under premier Junichiro Koizumi, who infuriated Beijing during his 2001-2006 tenure by going each year to a shrine that honours Japanese war dead including war criminals.

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