The use of force against Taiwan remains an option for China, President Jiang Zemin told President Clinton in a telephone call yesterday.
"We are not committed to abandoning the use of force on the issue," Mr Jiang said. However, he said China wanted peaceful reunification with Taiwan.
Share markets across the region dropped sharply following the comments despite attempts by Taiwan to defuse the situation.
Mr Clinton phoned Mr Jiang following comments by Taiwan's President Lee Teng-hui to the effect that the island was a separate state from the communist mainland, the official Xinhua news agency reported.
Sources said the People's Liberation Army (PLA) was placed on a level-two alert last week, one step above normal readiness, after Mr Lee said Taiwan's relations with Beijing should be conducted on a "state-to-state" basis.
"We will never sit idle if some people engage in `Taiwan's independence' and foreign forces interfere in China's reunification cause," Mr Jiang told Mr Clinton.
Taiwan's foreign ministry spokesman, Mr Henry Chen, responding to Mr Jiang's comments, said Taipei would not bow to pressure from Beijing to isolate it internationally.
He called for "the reality of our existence to be better understood by the world and that our voice be heard".
He appealed for a peaceful solution to the war of words, which caused falls of between 0.6 per cent and 1.3 per cent on share markets in the region.
Mr Clinton had telephoned Mr Jiang to reiterate Washington's commitment to a "one China" policy, Mr Xinhua said, which involves supporting the idea of eventual reunification.
"I want to assure you that policy will not change; you should have full confidence in the statements I have made to you in our previous meetings," Mr Clinton told the Chinese leader.
Washington broke off diplomatic relations with Taipei in favour of Beijing in 1979 and has never said that it would defend Taiwan in the event of a Chinese attack. It continues to sell it defensive weapons.
The closest the two sides have come in recent years to a military confrontation was in March 1996, when Mr Clinton sent a naval battlegroup to the Taiwan Straits to deter Beijing's war games during which it fired missiles into the sea near Taiwan.