The Japanese government has reached an agreement with the family that owns three of the five islands in the disputed Senkaku chain to purchase the territory for the nation.
Media reports in Japan said the government will pay the Kurihara family a total of Y2.05 billion (£16.4 million) for the islands, which are in the East China Sea off Japan's Okinawa Prefecture but are claimed by both China and Taiwan.
News that a deal has been struck is likely to provoke strong criticism from the governments in Beijing and Taiwan, as well as potentially triggering renewed outbursts of violence in both countries.
Tens of thousands of Chinese took to the streets in a dozen cities in mid-August after a group of Japanese nationalists landed on Uotsuri Island and unfurled Japanese flags. Television footage of the protests showed demonstrators ransacking Japanese restaurants and businesses and wrecking Japanese-made cars.
The Japanese government has declined to confirm that a deal has been signed, with a spokesman telling Kyodo News that the discussions were still under way.
According to the reports, a senior official met secretly with a member of the Kurihara family on behalf of Yoshihiko Noda, the prime minister, on Monday. Under the terms of the deal, the contract to transfer ownership of the Senkakus - which China knows as the Diaoyu islands and Taiwan refers to as the Tiaoyutai chain - will be signed by the family and the Japanese government by the end of this month.
The government has been forced to act decisively on an issue that has dogged Japan's relations with two of its nearest neighbours for decades after Shintaro Ishihara, the nationalist and outspoken governor of Tokyo, announced in April that he would purchase the islands and have them administered by the city government.
In an interview with the Wall Street Journal, Ishihara said Japan had to act to secure the sovereignty of the islands because failing to do so means the country would end up as a "second Tibet."
Under Ishihara's plan, the islands would be developed and port facilities would be constructed. On Friday, he repeated a call for the government to build a typhoon shelter for Japanese fisherman operating in waters around the islands. On Wednesday, he reportedly offered to hand over to the government money that has been pouring into a special account set up for the city as a "fighting fund" to buy the islands.
To date, more than Y1.4 billion (£11.3 million) has been donated by private individuals, although going ahead with any development work would be a highly provocative move.
China has repeatedly warned that building any structures on the islands would have severe repercussions on relations between the two countries.
The United States has previously stated that under the terms of the 1960 US-Japan security treaty it would help Japan to defend the islands if another nation attempted to seize them, but in Beijing on Wednesday Hillary Clinton said that Washington takes no position on the ultimate sovereignty of the uninhabited islands.
The US Secretary of State is on a six-nation tour of Asia and the Pacific and held talks with Hu Jintao, the Chinese president, and Yang Jiechi, the foreign minister. Beijing has requested that Washington not interfere in territorial disputes in the region.
The islands were formally annexed by Japan in January 1895 and an Okinawan businessman set up a fisheries plant on Uotsuri around 1900. The business failed during the war and the islands were evacuated. Three of the uninhabited islands were sold in the 1970s to the Kurihara family, with the remaining isles remaining the property of the national government.