Confirming the gist of the Washington Times report, Fallon said the submarine had been detected at close quarters by an aircraft carrier and its accompanying warships.

The Washington Times said the submarine had stalked the USS Kitty Hawk and surfaced within range of its torpedoes and missiles in "ocean waters" near the Japanese island of Okinawa.

"The characterization of stalking an aircraft carrier is rather sensational and I think it's probably not close to being accurate," Fallon told reporters in Malaysia, where he is attending an annual meeting of Asia-Pacific defense chiefs.

But he added: "The fact that you have military units that would operate in close proximity to each other offers the potential for events that would not be what we would like to see -- the potential for miscalculation."

"Now it turns out that the aircraft carrier and its escorting ships were out doing some exercises. I am told they were not engaged in anti-submarine exercises, so they were not looking for submarines. But if they had been, and this Chinese submarine happened to come in the middle of this, then this could well have escalated into something that was very unforeseen."

Fallon gave no other details of the incident.

He has been leading a push for closer ties with the Chinese military, amid regional fears about a defense build-up by Beijing. In August, U.S. ally Japan urged China to disclose more information on its military modernization to ease these concerns.

Fallon said China had declined his invitation to attend this week's closed-door meeting of Asia-Pacific defense chiefs, but that Beijing might attend future meetings.

"There is a need to have a fundamental understanding," he said, adding that Admiral Gary Roughead, commander of the U.S. Pacific Fleet, was currently visiting China for the first naval exercise between the United States and the People's Liberation Army.

"This is the kind of thing that we must encourage and continue so we can move ahead from what I would characterize as kind of Cold War thinking and truly broaden the dialogue."

A Chinese Foreign Ministry spokeswoman said on Tuesday she did not have information on the submarine incident.

"China has neither the intention nor the capability for a massive military build-up," Jiang Yu told a regular news conference in Beijing. "We will stick to the path of peaceful development. China is an important force in safeguarding peace in Asia-Pacific and in the world."

Fallon also highlighted North Korea's October 9 nuclear test, saying it posed a security threat, and he highlighted missile defense as an increasingly important aspect of regional defense.

"Missile defense is something that's important because these capabilities, these weapons are destabilizing in many respects and threatening to people," he said.

(Additional reporting by Guo Shipeng in Beijing)

Disclosure of the incident comes as Adm. Gary Roughead, commander of the U.S. Navy's Pacific Fleet, is making his first visit to China. The four-star admiral was scheduled to meet senior Chinese military leaders during the weeklong visit, which began over the weekend.

According to the defense officials, the Chinese Song-class diesel-powered attack submarine shadowed the Kitty Hawk undetected and surfaced within five miles of the carrier Oct. 26.

The surfaced submarine was spotted by a routine surveillance flight by one of the carrier group's planes.
The Kitty Hawk battle group includes an attack submarine and anti-submarine helicopters that are charged with protecting the warships from submarine attack.

According to the officials, the submarine is equipped with Russian-made wake-homing torpedoes and anti-ship cruise missiles.

The Kitty Hawk and several other warships were deployed in ocean waters near Okinawa at the time, as part of a routine fall deployment program. The officials said Chinese submarines rarely have operated in deep water far from Chinese shores or shadowed U.S. vessels.

A Pacific Command spokesman declined to comment on the incident, saying details were classified. Pentagon spokesmen also declined to comment.

The incident is a setback for the aggressive U.S.-China military exchange program being promoted by Adm. Fallon, who has made several visits to China in recent months in an attempt to develop closer ties.

However, critics of the program in the Pentagon say China has not reciprocated and continues to deny U.S. military visitors access to key facilities, including a Beijing command center.

In contrast, Chinese military visitors have been invited to military exercises and sensitive U.S. facilities. Additionally, military intelligence officials said Adm. Fallon has restricted U.S. intelligence-gathering activities against China, fearing that disclosure of the activities would upset relations with Beijing.

The restrictions are hindering efforts to know more about China's military buildup, the officials said. "This is a harbinger of a stronger Chinese reaction to America's military presence in East Asia," said Richard Fisher, a Chinese military specialist with the International Assessment and Strategy Center, who called the submarine incident alarming.

"Given the long range of new Chinese sub-launched anti-ship missiles and those purchased from Russia, this incident is very serious," he said. "It will likely happen again, only because Chinese submarine captains of 40 to 50 new modern submarines entering their navy will want to test their mettle against the 7th Fleet."

Pentagon intelligence officials say China's military buildup in recent years has produced large numbers of submarines and surface ships, seeking to control larger portions of international waters in Asia, a move U.S. officials fear could restrict the flow of oil from the Middle East to Asia in the future.

Between 2002 and last year, China built 14 new submarines, including new Song-class vessels and several other types, both diesel- and nuclear-powered.

Since 1996, when the United States dispatched two aircraft carrier battle groups to waters near Taiwan in a show of force, Beijing also has bought and built weapons designed specifically to attack U.S. aircraft carriers and other warships. "The Chinese have made it clear that they understand the importance of the submarine in any kind of offensive or defensive strategy to deal with a military conflict," an intelligence official said recently.

In late 2004, China dispatched a Han-class submarine to waters near Guam, Taiwan and Japan. Japan's military went on emergency alert after the submarine surfaced in Japanese waters.

Beijing apologized for the incursion. The Pentagon's latest annual report on Chinese military power stated that China is investing heavily in weapons designed "to interdict, at long ranges, aircraft carrier and expeditionary strike groups that might deploy to the western Pacific."

It could not be learned whether the U.S. government lodged a protest with China's government over the incident or otherwise raised the matter in official channels.

This gigantic metropolis of 25 million seemed destined to become the world's new capital city - provided China's economy, still surging at over 10% per annum, remains strong, and political stability continues. Beijing's massive new skyscrapers, huge government blocks, broad, traffic-clogged avenues and miasma of smog and dust give it the look of an imperial capital in a science fiction film.

Last week Beijing staged a grandiose summit for 48 African leaders who received $10 billion in aid from China's new leader, President Hu Jintao.

Energy-voracious China now gets 30% of its oil from Africa. Angola just passed Saudi Arabia as China's leading oil supplier. China is bent on securing the lion's share of Africa's supplies of oil and other strategic resources. China-Africa trade has surged 30% to $50 billion in 2003.

China's non-interference policy means its trade and aid come without strings, a major plus for authoritarian African regimes. At least China is not hypocritical. While Washington boycotts Sudan and Zimbabwe over human rights, it cozies up to other major violators like Egypt, Morocco, Algeria and Tunisia.

The summit was a lavish spectacle, with convoys of bigwigs in limousines racing down the avenues, dancers, drummers, acrobats, small armies of tough security details, and regiments of China's feared paramilitary police, the Wujing, scowling at everyone.

China announced a third-quarter trade surplus of $102 billion (US). Beijing's monetary reserves have finally topped $1 trillion US, surpassing the former cash king, Japan.

Beijing continues to finance America's spending binge by lending it billions.

China's mammoth trade surplus, and a rising flood of foreign investment, has swamped the nation's banks with cash.

This, in turn, has fueled indiscriminate speculative investments, particularly in real estate, and a gold-rush frenzy that often obscures China's solid economic development.

This flood of hot money poses a serious danger. Indiscriminate investment leads to overproduction, which then causes a deflationary crisis that could end in financial meltdown. Japan experienced similar phenomena in the 1990s.

China's government has been struggling without much success to restrain this investment dragon. Beijing refuses, however, to allow its controlled, seriously undervalued currency, the yuan, to float, as its trade partners demand.

The undervalued yuan has given China its huge surplus, the motor of growth that has pulled the nation out of poverty. China still needs to deal with hundreds of millions of struggling farmers, state industry workers, and unemployed. So it refuses to allow the yuan to inch up by more than 5%.

If the yuan were allowed to float, say Chinese bankers, people would rush to convert to dollars, causing a dire financial crisis.

Too much cash

Anyway, argue Chinese officials, why should China pay the price for America's profligacy in refusing to save and running huge government deficits by revaluing the yuan? The U.S. Treasury is printing too much money in order to keep America's debt-ridden economy growing.

Since 60% of all U.S. dollars end up abroad, the Bush administration's reckless spending and over-stimulative money policies have caused a dangerous world-wide cash flood and serious imbalances to the global economy.

U.S. Republicans would do well to take pointers on capitalism from China's Communists, who have beaten the Western devils at their own game.

"If we can encourage China to become a country of consumers, you can imagine what it would mean for US producers and manufacturers to have access to that market," he said.

Bush also said that the United States must remain present in East Asia because "we serve as a way to make sure that there's stability. And stability in the Far East, obviously, is essential for the United States in the long term."

"And therefore, that's why we'll have a presence there and should have a presence there for the long term," he said.

The interview came with less than one week before key US legislative elections in which Bush's Republicans worry that the unpopular war in Iraq may cost them control of the Senate, the House of Representatives, or both.