"A misjudgement on one side or the other could result in violence, and could result in conflict," Leon Panetta said at the start of an Asian tour.
His comments came as anti-Japanese protests continue to sweep China over a disputed island chain.
Demonstrators gathered in cities across China for a second day on Sunday.
Riot police used tear gas and water cannon in the southern city of Shenzhen to break up an angry crowd.
China is reasserting its claim to sovereignty over the disputed Senkaku or Diaoyu islands in the East China Sea, in the wake of a Japanese government decision last week to purchase the islands from their private Japanese owners.
Japanese Prime Minister Yoshihiko Noda has urged Beijing to take steps to protect Japanese nationals, but added that the authorities in both countries should "remain calm".
'Potential to expand'
Speaking in Tokyo, Leon Panetta said: "I am concerned that when these countries engage in provocations of one kind or another over these various islands, that it raises the possibility that a misjudgement on one side or the other could result in violence, and could result in conflict.
"And that conflict would then have the potential of expanding," he warned.
The US defence chief stressed that during his talks in Tokyo and later in Beijing he would appeal for restraint.
Mr Panetta also said that Washington did not take a position with regard to the territorial disputes in Asia.
He will also visit New Zealand as part of his tour.-British Broadcasting Corporation (September 16, 2012 4:48PM)
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