TOKYO - Japan said on Tuesday it was considering taking measures beyond diplomatic action in its feud with South Korea over a group of disputed islands, suggesting Tokyo may take the unusual step of extending the stand-off into the economic arena.

Finance Minister Jun Azumi suggested last Friday that Japan could roll back an emergency currency swap arrangement agreed last year and expiring in October.

Japanese media has also speculated that Tokyo could abort a plan to buy South Korean government bonds, a step agreed as part of financial and economic cooperation between the two countries.

Japan's cabinet on Tuesday held a meeting to discuss a response to what Japan considered a provocative visit of South Korea's president to disputed islands earlier this month.

Chief Cabinet Secretary Osamu Fujimura said Prime Minister Yoshihiko Noda told his cabinet to consider additional measures to deal with the conflict, beyond usual diplomatic channels.

"Prime Minister Noda instructed ministers to prepare peaceful solution in accordance with an international law, strengthen information policy ... and consider possible additional measures," Fujimura told reporters.

Azumi would not comment on the swap deal on Tuesday and other ministers said the issue was not even discussed.

The islands, known as Dokdo in South Korea and Takeshima in Japan, lie equidistant from the two mainlands and are believed to contain frozen natural gas deposits potentially worth billions of dollars.

Japan recalled its ambassador to South Korea after Lee became the first South Korean leader to set foot on the islands.

Azumi last week called off his trip to Seoul scheduled for this week and the government postponed two other ministerial-level meetings between the two countries originally planned for the end of the month.

Tokyo has said it will take the long-running islands territorial dispute to the International Court of Justice.

But it would be unusual for Japan to play the economic card in disputes with its neighbours.

"They are talking about it but I am not sure they will carry through the threats. Talk is cheap," said Koichi Nakano, Sophia University professor and political commentator.

Japan's ruling Democrats, under voter pressure and likely to lose the next election, seemed to have over reacted to media criticism that they were too soft in disputes with Japan's neighbours, said Nakano.