Japan is recalling its ambassador from South Korea for consultations after President Lee Myung-bak of South Korea made an unprecedented visit to islands claimed by both countries.
Lee Myung-bak is the first South Korean leader to visit the islands, which are known as Dokdo in South Korea and as Takeshima in Japan.
The trip was strongly criticised by Japanese Prime Minister Yoshihiko Noda.
The Kyodo news agency also reported that the two countries have postponed an annual meeting between their finance ministers as an apparent consequence of the visit.
The islands have been controlled by South Korea since 1953 and a small coastguard detachment has been stationed there since 1954.
The BBC reports the issue has flared sporadically in recent years. The islands are in fishing grounds which could also contain large gas deposits.
The visit was announced early on Friday. Then-Prime Minister Han Seung-soo visited the islands in 2008, also sparking a row with Japan.
In 2008 South Korea withdrew its ambassador to Japan after a book for Japanese teachers reportedly said Japan owned the islands.