* Japanese embassy in Beijing suspends passport services
* Some 1,000 Chinese boats expected to arrive in waters near disputed islands
* Japan Coast Guard patrol ships may clash with fishing boats
BEIJING/TOKYO, Sept 18 (Reuters) - Hundreds of Japanese businesses and the country's embassy suspended services in China on Tuesday, expecting further escalation in violent protests over a territorial dispute between Asia's two biggest economies.
China's worst outbreak of anti-Japan sentiment in decades led to protests and attacks on Japanese companies such as car makers Toyota Motor Corp and Honda Motor Co, forcing them to halt operations and prompting Chinese state media to warn that trade relations could deteriorate.
More protests are expected across China on Tuesday, which marks the anniversary of Japan's 1931 occupation of parts of mainland China.
Hundreds of protesters had gathered outside Japan's embassy again on Tuesday, some throwing water bottles at the building, which was protected by a heavy police presence, Reuters witnesses said.
Japan was also bolstering its defences around the disputed East China Sea islands after state media reported a flotilla of around 1,000 Chinese fishing boats was sailing towards them.
The Japanese coast guard said it has so far been unable to confirm the arrival of the fishing boats, but it spotted one Chinese fisheries patrol ship in waters near the disputed islands shortly before 7 a.m. (2200 GMT)
The Japanese government has set up an information-gathering operation to monitor the movements of the Chinese fishing boats.
China and Japan, which generated two-way trade of $345 billion last year, are arguing over the uninhabited islets in the East China Sea, a long-standing dispute that erupted last week when the Japanese government decided to nationalise some of them, buying them from a private Japanese owner.
The weekend protests mainly targeted Japanese diplomatic missions but also shops, restaurants and car dealerships in at least five cities.
Toyota and Honda said arsonists had badly damaged their stores in the eastern port city of Qingdao at the weekend.
On Tuesday, Toyota said it plans to halt operations at some of its factories in China, Kyodo news agency reported.
Other major Japanese brandname firms announced similar shutdowns on Monday and urged expatriates to stay indoors.