A senior Foreign Ministry official told a committee of the ruling Liberal Democratic Party on Thursday of the decision to freeze the loans, Kyodo said in the unsourced report.

Japan provided 86 billion yen (US$735 million; euro609 million) in loans to China in the 2004 fiscal year, which ended March 31, 2005, the news agency said.

The Japanese Foreign Ministry could not immediately confirm the report.

Ties between Japan and China have deteriorated sharply in the past year over maritime gas deposits, interpretations of World War II history and other issues.

"We have no other choice but to freeze loans considering the situation surrounding bilateral relations," Kyodo quoted Senior Vice Foreign Minister Yasuhisa Shiozaki as telling the LDP committee.

China has been notified of the decision through diplomatic channels, it reported.