An official immediately denied the reported proposal, which Japan's Nikkei business daily described as a compromise by Tokyo to break a long deadlock in negotiations.

Japan and China, two of the world's biggest energy importers, dispute control over potentially lucrative gas fields in the East China Sea.

China began test-drilling in 2003. Japan accuses China of starting production and siphoning off gas on Tokyo's side.

According to the Nikkei, Japan has proposed to China that the two countries jointly develop the entire area and work together to select companies that would be involved.

Tokyo would foot the bill for the drilling facility that China has already set up, said the newspaper, which did not specify its sources.

"Japan seeks to effectively shelve the contentious issue of setting a demarcation line," the Nikkei said.

China has previously proposed joint development only on what Japan considers its side of the maritime border.

The Nikkei said Japan's Vice Foreign Minister Shotaro Yachi made the proposal on a visit to Beijing in January and that Japan hoped for a deal in time for Chinese Premier Wen Jiabao's rare visit to Tokyo in April.

A trade ministry official involved in the negotiations denied the report.

"We've never thought of negotiating with China on such an idea," the official told AFP on condition of anonymity.