Spanish oil giant Repsol said it has suspended a multi-million-dollar oil exploration project in an area of the South China Sea off Vietnam claimed by both Hanoi and Beijing, amid reports of a spike in tensions between the communist neighbours.

Vietnam and China have long traded barbs over competing claims in the strategically important waterway, through which $5 trillion in trade passes annually.

Tensions erupted in 2014 when Beijing moved an oil rig into waters claimed by Hanoi, sparking deadly anti-China protests in Vietnam that lasted several weeks.

Vietnam has continued oil exploration activities in the sea since then, which analysts have said risk stoking anger from its powerhouse neighbour.

"Operations have been suspended," said Miguel Martinez, Repsol's chief financial officer, talking to analysts.

He added that Repsol has spent $27 million on the exploration off the southeastern coast of Vietnam to date and would continue to work with the country's officials and main state-run oil firm PetroVietnam.

The BBC reported last month that Vietnam had agreed to suspend the project under pressure from China, but officials in Beijing and Hanoi refused to confirm the report.

Vietnam's foreign ministry on Thursday defended its right to explore natural resources in its territory.

"Oil and gas exploration in Vietnam with a Spanish partner are normal economic activities," spokeswoman Le Thi Thu Hang told reporters.

Vietnam is often seen as shying away from confrontations with its much more powerful neighbour in the South China Sea, and the latest episode appears in line with that track record.

"This is an apparent backdown," said Vietnam expert and analyst Carl Thayer.

"Vietnam needs time to explore its options and this will include diplomatic contacts with Beijing... the situation is now wait and see."

Vietnam is rich in oil and gas reserves, though revenues from the sector have decreased along with a dip in global crude prices.

In June, a scheduled meeting between senior military officials on the Vietnam-China border was abruptly cancelled, raising suspicions that tensions may have flared behind closed doors.

Beijing and Hanoi officially said the meeting was cancelled due to a scheduling conflict.

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