* Top China diplomat says row "controllable"
* U.S. calls for calm, urges peaceful resolution
* Dispute tests Vietnam's uneasy ties with neighbour
* Vietnam stock markets tumble on fears of conflict
By Ben Blanchard and Nguyen Phuong Linh
BEIJING/HANOI, May 8 (Reuters) - China on Thursday rejected Vietnamese claims it acted aggressively in the South China Sea and called for a peaceful end to a bitter row sparked by Beijing's parking of a giant oil rig in contested waters.
Chinese Vice Foreign Minister Cheng Guoping said no "clash" had taken place since the dispute erupted at the weekend. He was responding to Vietnam's assertions that Chinese vessels used water cannon and intentionally rammed eight of its ships, seriously damaging two, and wounding six sailors.
"I don't believe there was a clash. I think this was a difference of opinion on some disputes," Cheng told reporters on the sidelines of a forum in Beijing.
"The area in dispute is Chinese territory and of course we will maintain the country's core interests and defend our sovereignty. Vietnam should know this," Cheng said, adding that the two countries can resolve disputes through "peaceful talks".
"This dispute is not about the entire relationship between China and Vietnam. It's localised. It is controllable."
The two Communist nations have sought to put aside border disputes and memories of a brief border war in 1979. Vietnam is usually careful about comments against China, for which it relies on for political support and bilateral trade that surpassed $50 billion in 2013.
Still, Hanoi has strongly condemned the operation of the drilling rig, the first such action by Beijing in contested waters, and told the owners, China's state-run oil company CNOOC, to remove it.
China has parked about 80 ships around the rig, Vietnamese officials have said, adding that seven of them were military. Its foreign ministry on Wednesday showed reporters what it said were video clips of Chinese ships hitting Vietnamese Seaguard vessels.
Hanoi has also hinted at international legal action and said it had requested dialogue with China's leadership, but was awaiting a response.
Daniel Russel, the U.S. Assistant Secretary of State for East Asia and Pacific, reiterated Washington's concerns about "dangerous conduct and intimidation by vessels" in the disputed area. He met senior Vietnamese leaders on Thursday and said the row had been discussed at length.
"It's fair to say both Vietnam and China have rights to claim sovereignty over the Paracels (islands)," Russel told reporters in Hanoi.
"It is not for the U.S. to say which position is stronger. It's within the rights of the United States and the international community to call all parties to address the dispute in a peaceful way."
ROW ROCKS VIETNAM MARKETS
The row with its neighbour sent Vietnam's stocks markets plummeting on Thursday. The benchmark VN Index in Ho Chi Minh City closed down 5.9 percent, its biggest one-day fall in nearly 13 years, while the smaller Hanoi bourse dropped 6.4 percent, its biggest slump since May 2010.
The country's State Securities Commission issued a statement urging investors to respond rationally to news about the dispute.
"We suggest investors stay calm, careful and avoid being taken advantage of," it said, without elaborating.
The row comes days after U.S. President Barack Obama visited Asia to underline his commitment to allies including Japan and the Philippines, both locked in territorial disputes with China.
Obama, promoting a strategic "pivot" towards the Asia-Pacific, also visited South Korea and Malaysia, but not China. Washington has been trying to court Vietnam as a new ally in the region with trade and military incentives, ostensibly to lessen Hanoi's uneasy dependence on Beijing.
However, regional military and diplomatic sources who have been briefed on U.S. navy movements said Washington had not deployed any warships close to the disputed area, although routine surveillance flights over the South China Sea were on-going.
Tensions are also brewing in another part of the sea, with Beijing demanding that the Philippines release a Chinese fishing boat and its crew seized on Tuesday off Half Moon Shoal in the Spratly Islands.
Philippine police said the boat and its crew were seized for hunting sea turtles, which are protected under local laws.
In Hanoi, Vietnamese officials said diplomats from both sides had met six times since Sunday to defuse the row but insisted Vietnam would stand up to any Chinese aggression in the energy-rich waters.
Tran Cong Truc, a former head of the national border committee of Vietnam, said his country was now in a tricky spot, as China had infringed on not just its territory, but its economic assets.
Vietnam's recent history, he said, had shown it was not worth picking a fight with.
"Vietnam is a peace loving country, but don't wake up the dragon," he said. "We never want war but it all depends on whether China wants to start a war in the region or not." (Additional reporting by Greg Torode in Hong Kong; Writing by Michael Martina and Martin Petty; Editing by Raju Gopalakrishnan)
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