South Korea has rejected a proposal by Japan to take the dispute over a group of islands to the International Court of Justice.
Japan made the proposal amid tensions between Tokyo and Seoul, which intensified after a visit to the islands last week by President Lee Myung Bak.
South Korea, calls the islands 'Dokdo', and claims they are clearly an integral part of South Korea's territory.
Japan also claims the islands it calls 'Takeshima'.
Japan is now reviewing a currency swap deal with South Korea and is cancelling a high-level visit.