TOKYO (Reuters) -Within days of China urging its citizens not to travel to Japan due to a diplomatic dispute, Tokyo-based tour operator East Japan International Travel Service had lost 80% of its bookings for the remainder of the year. 

The small firm, which specialises in group tours largely for Chinese clients, is at the sharp end of a backlash that threatens to deal a sizeable blow to Japan's economy, the world's fourth largest.

The travel warning - triggered by Japanese Prime Minister Sanae Takaichi's remarks about Taiwan, the democratically governed island claimed by China - has seen a wave of flight cancellations and battered tourism-related stocks in Japan.

"This is a huge loss for us," said Yu Jinxin, vice president of East Japan International Travel Service.

Tourism accounts for around 7% of Japan's overall gross domestic product, according to the World Travel & Tourism Council, and has been a major driver of growth in recent years. Visitors from mainland China and Hong Kong account for around a fifth of all arrivals, official figures show. 

The boycott could result in a loss of around 2.2 trillion yen ($14.23 billion) annually, Nomura Research Institute estimates. Tourism-related stocks in Japan have sunk since the warning was issued on Friday.   

Already more than 10 Chinese airlines have offered refunds on Japan-bound routes until December 31, with one airline analyst estimating around 500,000 tickets have already been cancelled.

NO SIGNS OF IMMINENT BREAKTHROUGH

Takaichi sparked the most serious diplomatic dispute in years between Asia's top two economies when she told Japanese lawmakers this month that a Chinese attack on Taiwan threatening Japan's survival could trigger a military response. 

A wave of vitriolic responses by a Chinese diplomat in Japan and Chinese state media aimed at Takaichi prompted Japan to warn its citizens in China on Monday to step up safety precautions and avoid crowded places.

Beijing has demanded Takaichi retract her remarks, though Tokyo has said they are in line with the government's position, suggesting no breakthrough is imminent.

China has also suspended the screenings of upcoming Japanese films, and Japanese celebrities popular there have tried to pre-empt any potential backlash.

"China is like my second homeland to me and all my friends in China are my cherished family-I will always support One China," Japanese singer MARiA wrote on Weibo on Tuesday. 

Tour operator Yu says her company has been able to weather past flare-ups between the neighbours, such as Tokyo's decision to nationalise disputed islands in 2012 that triggered mass anti-Japan protests across China. 

But a protracted crisis this time could be devastating, she said.

"If this lasts for one or two months, we can manage, but if the situation continues to worsen, it will obviously have a major impact on our business."

(Reporting by Joseph Campbell and John Geddie in Tokyo; Additional reporting by Ethan Wang and Shi Bu in Beijing; Editing by Lincoln Feast.)