China has rebuffed Vietnam's allegations that a Chinese oil rig was drilling in dispute waters of the South China Sea. However China's foreign ministry has confirmed that the rig is conducting drilling activities in 'completely undisputed' Chinese waters.

"According to what is understood, China's Haiyang Shiyou 981 drilling platform is operating in Chinese-controlled waters that are completely undisputed," Chinese Foreign Ministry spokesman Hong said, Reuters reported.

"We hope the Vietnamese side can view this calmly, meet China half way and jointly work hard to appropriately handle relevant maritime issues."

Vietnam had earlier objected to China moving its Haiyang Shiyou oil rig to an area of the waters where the two countries' continental shelves overlap. The rig was at the centre of a fierce diplomatic row between the communist neighbours that ad also resulted in violent anti-China protests in Vietnam that claimed the lives of more than 20 people.

China's Maritime Safety Administration said the drilling is taking place roughly 140 km (87 miles) south of the resort city Sanya on China's Hainan island, and 150 km (93 miles) west of the Paracel Islands. The area is 210 km (130 miles) from the coast of Vietnam. The agency added that it would be operating the rig until March 10.

Paracel islands is at the centre of the maritime dispute between China and Vietnam, whose annual trade turnover is pegged at $60 billion.

China scored decisive military victories over Vietnam in recent decades in its quest to cement claims over the island chains. In 1974, more than 70 Vietnamese soldiers died in China's military offensive that seized control of Paracels. In 1988 Vietnam lost Spratlys to China in another bloody military conflict.

China, Taiwan, Malaysia, the Philippines, Vietnam and Brunei have made claims to a clutch of shoals, rocky outcrops, atolls and sandbanks in the sprawling South China sea.