China has abruptly cancelled an invitation for 1,000 young Japanese to visit the Shanghai Expo amid a widening dispute over Japan’s detention of a Chinese fishing boat captain in disputed waters of the East China Sea.

The young people were supposed to travel to Shanghai on Tuesday at the invitation of Wen Jiabao, the Chinese premier. However, Japanese officials said the All China Youth Federation had announced late on Sunday night that the exchange could not go ahead because the “atmosphere is inappropriate”.

“The Chinese decision … is very inappropriate and regrettable,” said Takeshi Matsunaga, a Japanese foreign ministry spokesperson.

The dispute over the detention of the Chinese captain Zhan Qixiong following a clash with Japan’s coast guard has already become the biggest setback to Sino-Japanese relations since they ended a half-decade diplomatic chill in 2006.

The cancellation of the visit by the 1,000 young people, mostly university students whose travel and accommodation costs were to be covered by China, marks the widening of the dispute beyond government exchanges.

Mr Wen had extended the invitation during a visit to Tokyo in May, making it a symbol of efforts to defuse the popular antipathy that has long marred relations between East Asia’s pre-eminent powers.

Beijing has in recent days stepped up its demands for Mr Zhan’s immediate release. On Sunday, the Chinese government announced the suspension of senior-level official contacts following the decision by a Japanese court to allow prosecutors to hold Mr Zhan for another 10 days while deciding whether to charge him.

“We would like to encourage the Chinese side to take a restrained and calm position so as not to further escalate the situation,” Mr Matsunaga said.

Another foreign ministry official said the sudden cancellation of the youth exchange marked a troubling escalation. While Beijing has held out the possibility of rescheduling the visit, this was practically impossible given that the Expo ends next month.

The official added that while it was “understandable” China was seeking to defend its territorial claim to the disputed island group – known as Senkakus in Japanese and Diaoyus in Chinese – the cancellation meant “innocent youth now have to suffer from this quarrel”.