TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe said on Tuesday he was open to a meeting with Chinese leaders to rebuild ties damaged by a territorial dispute but said there was no room for negotiations on their row over a group of small islands.

The remarks came after China's Communist Party chief, Xi Jinping, told a Japanese envoy sent to Beijing last week that he was committed to developing bilateral ties and would consider holding a summit meeting.

Relations between the world's second- and third-largest economies plunged after the Japanese government bought three disputed islands from a private owner last September, sparking anti-Japan protests across China. Some Japanese businesses were looted and Japanese citizens attacked.

"It is precisely because we have a problem that we should hold the summit between leaders and have high-level talks," Abe said on a television program. "I would like to consider a top-level summit if circumstances allow."

The conservative prime minister has just increased the defense budget for the first time in 11 years and swept back to power in a December election calling for the protection of Japan's "beautiful seas".

He reiterated Japan's stance on the islands, which it controls. Japan calls them the Senkaku while China calls them the Diaoyu.

"The Senkaku Islands are our land and China has taken provocative steps against them ... we have been clear that there is no room for negotiation on this matter," he said.

"But on top of that, there's an economic relationship. Japan invests in China and reaps benefits from exporting its goods there while China creates job places thanks to Japanese investment," said Abe, adding that maintaining strong economic ties were vital for both countries.

"If top-level meeting was necessary to achieve that, we should do it and from that point on rebuild our relationship."

(Reporting by Antoni Slodkowski; Editing by Robert Birsel)