TOKYO — Japanese prosecutors decided Friday to release a Chinese fishing boat captain involved in a collision near disputed islands, following intense pressure from China in the worst spat between the Asian neighbors in years.

The move will likely diffuse the escalating tensions sparked when Japan arrested the captain earlier this month after his trawler collided with two Japanese patrol boats near islands in the East China Sea claimed by both countries.

Beijing suspended ministerial-level dialogue with Tokyo and postponed talks on developing disputed undersea gas fields. Chinese Premier Wen Jiabao earlier this week sternly threatened "further action" against Japan if it did not immediately release the captain.

On Thursday, Beijing said it was investigating four Japanese suspected of illegally filming military targets and entering a military zone without authorization. Also, there were reports China had suspended Japan-bound shipments of rare earth metals critical in advanced manufacturing.

The captain’s arrest, and the territorial dispute behind it, stirred nationalistic sentiment in China and Japan and threatened to undermine business ties between their intertwined economies — the world’s second- and third-largest.

It is also one of several territorial spats straining China’s ties with its Asian neighbors while its increasingly powerful navy enforces claims in disputed waters. Washington has signaled its intention to protect its interests in those waters and to keep them open for commerce, drawing China’s irritation by urging it to resolve the disputes.

Prosecutors in Okinawa, southern Japan, where the 41-year-old captain, Zhan Qixiong, has been in custody for more than two weeks, said they would let him go partly because they did not perceive any premeditated intent to damage the Japanese coast guard boats — but also for diplomatic reasons.

"We have decided that further investigation while keeping the captain in custody would not be appropriate, considering the impact on the people of our country, as well as the Japan-China relations in the future," said Toru Suzuki of the Naha, Okinawa, prosecutors office.

Authorities in Okinawa also said they wouldn’t officially close the case — leaving room for some ambiguity that would allow both countries to save face.

"The Japanese government had to balance the Japanese people’s feelings about the territorial issue and those of China and Taiwan and seek a win-win scenario which is to be ambiguous," said Takehiko Yamamoto, an international politics professor at Waseda University in Tokyo.

But others, including Tokyo’s outspoken governor, Shintaro Ishihara, said Japan had caved in to Chinese pressure. "The government made an incredibly wrong decision in this case," he said.

Comments left on popular Japanese online communities were largely critical of the move. One Tweet said it was like "admitting Japan is wrong!"

Japanese news reports said Zhan would likely be released later Friday. Chinese Foreign Ministry spokeswoman Jiang Yu said China would send a charter flight back to bring him home.

"I reiterate that what Japan did to the Chinese boat captain in its so-called judicial proceedings were illegal and invalid," Jiang said in a statement posted on the ministry’s website.

Zhan was arrested on Sept. 8 after the collision off the uninhabited chain of islands call Diaoyu or Diaoyutai in Chinese and Senkaku in Japanese. Located 120 miles (190 kilometers) east of Taiwan, the islands are controlled by Japan, but also claimed by Taiwan and China.

Prosecutors had detained and questioned the captain while they decided whether to press charges. His 14-member crew and ship were returned to China.

At a regular press conference, Chief Cabinet Secretary Yoshito Sengoku said that Tokyo had no input on the prosecutors’ decision, and that they respected it as such.

But he also said he hoped that the two countries could quickly put the incident behind them and work at repairing relations.

"It is a fact that Japan-China relations had the potential, and were showing indications, of worsening over this issue," he said.

Washington has urged China to resolve separate, long-running territorial disputes with its Southeast Asian neighbors involving the Spratleys and other islands in the South China Sea. President Barack Obama was expected to sign a communique on the issue with Southeast Asian leaders later Friday in New York. Beijing has accused Washington of interfering in an Asian issue.

Liu Jiangyong, a professor with Institute of International Studies at Tsinghua University in Beijing, called the release a "wise decision" by the Japanese government that could even lead to stronger ties.

"The decision may become a turning point for the improvement of relations between the countries, and both sides should grasp the opportunity to get relations back to the correct track," Liu said.

But new wrinkles this week could complicate matters.

Fujita Corp., a Japanese construction company, confirmed Friday that four of its Japanese employees were being questioned by Chinese authorities. The company said the men traveled to Hebei province on Sept. 20 to gather information about the area, and were working to prepare a bid for a project to dispose of chemical weapons abandoned in China by the Japanese military during World War II.

Chinese authorities accuse the men of entering a military zone without authorization.

Meanwhile, Japanese trading company officials said that starting Tuesday, China had halted exports to Japan of rare earth elements, which are essential for making superconductors, computers, hybrid electric cars and other high-tech products. Japan imports 50 percent of China’s rare earth shipments.

China’s Trade Ministry denied reports that Beijing is tightening curbs on exports of rare earths to Japan, but Japan’s trade minister, Akihiro Ohata, said he has "information" that China’s exports to some Japanese trading houses have been stopped. He said China’s government has not informed Tokyo of such a move.

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Associated Press writers Mari Yamaguchi, Shino Yuasa and Jay Alabaster in Tokyo and Alexa Olesen and Anita Chang in Beijing contributed to this report.