China sliced its bond holdings to 889.0 billion dollars at the end of January from 894.8 billion dollars the previous month, the Treasury Department's latest figures on international capital flows showed.

The January level was the lowest since June last year when China held 915.8 billion dollars in bonds.

Despite this, the third consecutive monthly drop, China remained the top owner of US government debt.

Japan was far behind in the number-two spot with 765.4 billion dollars in bonds, little changed from its December figure of 765.7 billion dollars, the data showed.

News of the drop in Chinese Treasury holdings came as Chinese Premier Wen Jiabao blamed the United States on Sunday for recent tensions in Sino-US ties, saying Washington must take steps to repair the damage and indicating no let-up in their diplomatic row.

Wen accused Washington of violating China's sovereignty when it approved the sale of billions of dollars in weapons to Taiwan in January, and again when US President Barack Obama met the Dalai Lama at the White House last month.

Relations between the two countries have deteriorated over a series of other issues -- Google's threat to leave China over cyberattacks and web censorship, a string of trade disputes, and the value of the Chinese yuan.

Wen said Beijing would resist any foreign pressure for a stronger Chinese currency, three days after Obama called on Beijing to adopt a "market-oriented" policy on the yuan, which has been effectively pegged to the dollar since mid-2008.

"Market participants scaled back their expectations of renminbi (yuan) appreciation after Wen's comment, while the development also appeared to unsettle regional currency markets," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

Speculation is mounting that the US Treasury will soon label China a currency "manipulator" in a semi-annual report in April amid charges Beijing is keeping its currency depressed to make its exports more competitive.

"China's policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done," said Nobel Prize-winning US economist Paul Krugman.

He argued in a weekend commentary in The New York Times that the US had little to fear if China retaliated by dumping US bonds even though such a move could cause a sharp depreciation in the dollar against other key currencies, such as the euro.

Krugman said the dollar slide would make US goods more competitive and reduce its trade deficit but on the other hand, "it would be a bad thing for China, which would suffer large losses on its dollar holdings."

China has the world's biggest reserves, at 2.4 trillion dollars, which some economists say it accumulated by selling the yuan and buying the greenback in a bid to keep its exports artificially competitive.

The Treasury Department created a stir last month when it announced China had slashed its bond holdings to 755.4 billion dollars in December -- the biggest drop since August 2000, allowing Japan to become the top holder of American government debt.

But two days later, the department produced sharply revised data indicating that while China had cut back on its bond holdings, the level was still well above that of Japan.

The revision came when the department looked at Chinese holdings in US Treasuries held in third markets such as Britain and Hong Kong, which were not picked up by the earlier estimates.

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