Beijing claims all of the Spratlys and has built a number of military installations on the islands.
A Chinese People's Liberation Army Navy Luyang-class destroyer challenged the US Navy Arleigh Burke-class destroyer USS Decatur to a showdown in the South China Sea Sunday during a close pass of Chinese-occupied islands.
US media outlets reported a statement from the US Defense Department describing "increasingly aggressive" maneuvers conducted by a China ship which engaged in a literal game of chicken with a US ship. Fiery Cross is located in the western part of the Spratly Islands group.
The Chinese "destroyer approached within 45 yards (meters) of Decatur's bow, after which Decatur maneuvered to prevent a collision".
China expressed anger at the U.S operation, calling it a threat to its sovereignty.
The American ship was observing China's new aircraft carrier, the Liaoning, as it made its first voyage in the South China Sea from its home base in Qingdao.
Military tensions between the US and China have been rising as a worsening trade war prompts concern in Beijing over whether President Donald Trump's latest tariffs are part of a broader plan to stop the country from eroding American dominance of the Asia-Pacific region.
This photo taken on December 24, 2016 shows the Liaoning, China's only aircraft carrier, sailing during military drills in the Pacific.
The Chinese armed forces will continue to take all necessary steps to protect the country's sovereignty and security, the ministry said.
China's defence and foreign ministries each released statements Tuesday sharply criticizing the United States, though not disputing details of the US accusations involving the Decatur.
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Freedom of navigation operations are meant to enforce the right of free passage in worldwide waters.
Just a few days before the near collision of two destroyers, and just after the US Air Force flew multiple strategic bombers overhead, Chinese warplanes conducted live-fire exercises between the rocky outcrops.
A trade war launched by Trump has infuriated Beijing, as did his authorization of a $1.3 billion arms sale to Taiwan, which China considers a rebel province and which it claims as its own.
Washington and Beijing hit each other with the largest round of tariffs yet last week, now covering roughly half their goods traded.
"The Chinese side strongly urges the U.S. side to immediately correct its mistakes and stop such provocative operations", Hua said, adding that China would take all necessary measures to safeguard its national sovereignty and security.
The incident comes amid rising tensions between the naval powers.
On Monday, a USA official confirmed that Defense Secretary Jim Mattis had canceled a planned trip to China in October after China had downgraded the level of officials he was to meet.
China, however, claims a huge area, known as the "nine-dash line", and routinely accuses the US Navy of provocation and interference in regional matters.