(Updates with background, details, paragraphs 8, 11-13, 17-21)
BEIJING, Sept 23 (Reuters) - A Chinese trade official on Thursday denied a New York Times report that China had banned exports of rare earths to Japan following the arrest of a Chinese trawler captain near disputed islands.
The report, which was sourced to unnamed industry experts, said an initial trade embargo on all exports of rare earth minerals would last through the end of this month.
"China has not issued any measures intended to restrict rare earth exports to Japan. There is no foundation for that," said Chen Rongkai, a spokesman for China's Ministry of Commerce.
"I don't know how the New York Times came up with this, but it's not true. There are no such measures."
This week, Chinese Premier Wen Jiabao threatened retaliatory steps against Japan unless it released the trawler captain, whom Tokyo accuses of ramming with two Japanese coastguard ships.
Major rare earths traders in China and Japan told Reuters they had not heard of any ban. One Japanese trade official told Reuters that he had heard rumours of an embargo, but could not comment further.
Rare earths, a group of 17 metallic elements including yttrium and lanthanum used in small quantities to enhance batteries, computer and weapons systems, and other applications, are generally found together.
China is the dominant source of rare earths, accounting for 97 percent of world supply in 2009. Steep cuts in export quotas for the second half of this year mean that total export quotas for 2010 are about 40 percent below 2009 levels.
"Rare earths export quotas were cut pretty sharply and have been basically used up, you can't export any to Europe or the U.S. either. People think it's about Japan, but it isn't," said Bruce Zhang, a rare earths expert at consultancy Asian Metal.
"This has nothing to do with the fishing boat incident. The export quotas were issued long before that."
China has gradually over several years reduced exports of rare earths and some minor metals through a quota system designed to keep more of the minerals for its own industry. That effort has been undermined by smuggling, especially through Vietnam.
DISPUTED ISLANDS
The trawler dispute, which analysts say is largely a row over energy resources beneath the sea around the islands that both claim, has heightened tensions between Asia's biggest economies.
A group of activists set sail from Hong Kong for the disputed Diaoyu or Senkaku islands on Thursday, after being turned back by Hong Kong marine police on Wednesday.
Beijing has already suspended high-level contacts with Japan over the issue and postponed talks on increasing flights between two countries with close business and trade ties.
Japanese prosecutors have until Sept. 29 to decide whether to bring charges against the captain.
Chinese media have quoted researchers as speculating that cutting rare earths and other exports to Japan would be an option open to China, if the spat escalates.
"Japan has a great need for these resources from China, reducing or restricting resource exports to Japan would be a useful measure," the Global Times newspaper cited Ministry of Commerce researcher Tang Chunfeng as saying.
Rare earth miners in Canada, Australia and elsewhere are citing the reduction of supply from China when seeking financial backing for their own projects, leading some industry experts to project that any supply squeeze will be short-lived.
Also this week, hundreds of workers at a unit of Japanese-owned Synztec Precision Parts (Shenzhen) Co Ltd went on strike for higher pay, the Apple Daily on Thursday quoted Shenzhen television as saying.
That strike was the latest in a series of labour actions by Chinese workers at Japanese factories this year.
An employee at Synztec Precision confirmed the strike at the company's subsidiary in Longgang, but she believed the dispute was resolved. She also said she had no other information. (Reporting by Lucy Hornby, Chris Buckley and Jim Bai in BEIJING, Linda Sieg in TOKYO and Alison Leung in HONG KONG; Writing by Lucy Hornby; Editing by Alex Richardson)