"China will not engage in any arms race or pose a military threat to any other country," the 91-page white paper said.

"China is determined to remain a staunch force for global peace, security and stability."

The communist nation's 2.3 million-strong military is the world's largest but has been criticized for its lack of transparency about its buildup.

Its reported 2006 budget is $35 billion, but analysts believe the true figure, which doesn't include weapons purchases and other key items, is several times higher. By comparison, U.S. President George W. Bush has signed a bill authorizing $532 billion in defense spending for the 2007 fiscal year that began Oct. 1.

One of Beijing's key short-term goals has been to take a firm stand against any independence efforts by Taiwan, the self-ruled island that the communist mainland claims as part of its territory.

It has hundreds of missiles pointed in its direction across the Taiwan Straits.

China has also spent heavily to beef up its arsenal with submarines, jet fighters and other high-tech weapons.

"The struggle to oppose and contain the separatist forces for Taiwan independence and their activities remains a hard one," the report said.

It indirectly criticized the United States for promising Beijing that it will adhere to the "one-China" policy, "but it continues to sell advanced weapons to Taiwan, and has strengthened military ties with Taiwan."

Washington switched diplomatic recognition from Taipei to Beijing in 1979 but remains Taiwan's major foreign backer, and is committed by law to providing it weapons to defend itself against possible Chinese attack.

China has announced double-digit military spending increases nearly every year since the early 1990s, causing unease among its neighbors.

But despite its huge size, its forces are said to lag well behind those of other major countries. In recent years, leaders have focused on improved training and advanced technology, hoping to close that gap.

"This increase...is compensatory in nature, and is designed to enhance the originally weak defense foundation," the white paper said. "It is a moderate increase in step with China's national economic development."

It said the Army is speeding up upgrades of battle equipment while the Navy is building up its weaponry and troops. The Air Force is giving priority to the development of new fighters as well as air and missile defense weapons, it said. No details were given.

The Democrat from California who will take over next week as chairman of the House International Relations Committee, Tom Lantos, said his panel will "closely examine" the deal next week to see if the sanctions would apply. The ranking Republican on that committee, Rep. Ileana Ros-Lehtinen, a Republican from Florida, said she will also be looking closely at the deal.

The Chinese company involved in the deal, the Chinese National Offshore Oil Corporation, or CNOOC, is state controlled but has some independent directors, including a former vice chairman of Goldman Sachs Asia. It is listed on the New York Stock Exchange. The company attracted American press attention in 2005, when it launched a $18.5 billion bid for the American oil company Unocal that it eventually withdrew amid congressional opposition.

The deal with Iran will test the effectiveness of the recently reauthorized Iran Libya Sanctions Act, which was originally championed by a senator from New York, Alfonse D'Amato. The deal also poses a direct challenge to America's financial war against Iran. For the past year, the Treasury Department has discreetly pressured Japanese and European banks to divest from Iran and end their relations with Iranian companies and banks, warning that such deals could risk the banks' own access to American financial markets.

Because the Iran- China deal was announced on December 22, only a day before the U.N. Security Council unanimously approved new sanctions against Iran's nuclear program, it also signaled China's willingness to soften any economic blow to the new sanctions would inflict on Iran. Others say that the China- Iran deal is driven on the Chinese side not by geopolitical considerations but strictly by economics, as China struggles to find affordable energy to support its booming economic growth.

Yesterday, a State Department official who requested anonymity said Foggy Bottom was trying to determine whether the deal with CNOOC is to purchase liquefied gas or whether it would actually entail CNOOC's investment in new facilities in Iran to liquefy the natural gas for export.

"Obviously, if this would involve some investment in gas liquefication facilities - we don't know that it does - then that would be a violation of the Iran Libya Sanctions Act. A strict purchase raises political concerns, but not legal concerns," the official said. When asked about those political concerns, the official said, "It would mean the Iranians would have another $16 billion for international terrorism and to pursue weapons programs."

Lawmakers were similarly blunt in warning of the consequences of the deal. Mr. Lantos said, "When the Congress convenes next week, the International Relations Committee will closely examine the reported $16 Billion Memorandum of Understanding China's state-owned oil company signed with Iran to develop Iranian gas fields." He added that his committee would specifically examine whether the deal would trigger penalties envisioned under the new Iran sanctions law. " China needs to be warned of the serious penalties it may incur if it pursues implementation of this agreement," he said.

Ms. Ros-Lehtinen said she would examine whether the deal would trigger penalties. "If this investment is confirmed, I will seek to ensure that this Chinese entity is penalized to the fullest extent. Chinese entities have a nefarious history of providing critical assistance to rogue regimes for their missile and unconventional weapons programs, and China also provides an economic lifeline to these threats to global peace and security," she said. "As such, we must carefully review any activity that would indirectly benefit or reward Chinese rogue clients like Iran and Syria."

Despite the tough talk, there is no precedent for enforcing the ten-year-old secondary sanctions that are on the books for foreign investments in Iran's energy sector. When Russia's Gazprom, France's Total and Malaysia's Petronas companies signed a $2 billion deal to develop Iran's South Pars gas field in 1997, the Clinton administration waived any sanctions required by law.

The deputy director of research at the Washington Institute for Near East Affairs, Patrick Clawson, said yesterday that it was unclear whether the Chinese government had approved the deal CNOOC announced last week, noting that Chinese companies in the past have pursued investments without checking with Beijing. But he added that if the deal was approved by the Chinese foreign ministry, it would hurt American efforts to present effective disincentives to Iran for its nuclear program.

"If in fact Chinese companies are prepared to make major investments in Iran, it is going to be more difficult for America to achieve its goals to pressure Iran on weapons of mass destruction and delivery systems," Mr. Clawson said.

The president of the Center for Security Policy, Frank Gaffney, said he was not holding out hope that any government sanctions would be applied to CNOOC. "The president keeps waiving the sanctions on foreign firms," he said. "We have come up with as an alternative approach. Americans investing in companies like CNOOC ought to divest from those companies if they are doing business with our enemies. This is not only inconsistent with the investor's moral values, but inconsistent with the national interest and a fiduciary risk."

One investor in CNOOC is the New York City retirement fund, which owns more than $8 million worth of CNOOC stock. Yesterday, a spokeswoman for New York City comptroller William Thompson said the comptroller's office is looking into those holdings.

The New York State Common Retirement Fund directly owned $5.2 million worth of CNOOC Ltd. as of March 31, according to the fund's annual report.

Both measures are considered cornerstones of Abe's conservative agenda to bolster Japan's military status and rebuild national pride in a country that had long associated patriotism with its imperialist past. The legislation cleared the upper house of parliament on Friday after winning approval in the lower house last month and will come into effect early next year.

Abe, Japan's first prime minister born after World War II, had made education reform a key issue during his campaign to succeed Junichiro Koizumi in September. His bid to restore patriotism in schools has drawn harsh criticism from Japanese pacifists, who have argued that such a law echoes the state-sponsored indoctrination of children practiced by Japan's past military leaders.

But Abe and other proponents have countered that a renewed embrace of patriotism is an essential step forward for Japan as it gradually emerges from a decades-long sense of guilt over World War II. In recent years, for instance, local municipalities have begun enforcing laws requiring the national anthem to be sung and the Japanese flag flown at certain school ceremonies, despite objections from teachers unions, which remain one of the last bastions of pacifism in Japan.

The education reform law is likely to dramatically increase the number of schools using revisionist textbooks that have been heralded by conservatives here but decried by Japan's wartime victims -- particularly China and South Korea -- as whitewashing its past aggression. Such books, for instance, omit reference to "comfort women," a euphemism for the thousands of Asian women forced into sexual bondage by the Japanese military during the 1930s and 1940s.

"The revision bears the historic significance of clearly showing the fundamental idea of education for a new era," Abe said in a statement lauding the law's passage.

Also approved were a key set of bills upgrading Japan's Defense Agency -- created in 1954 following the end of the American occupation of Japan -- to the status of a full ministry. The move affords greater clout to defense officials in national policymaking and budget decisions, something long considered taboo here in the decades following the war.

The primary mission of Japan's Self Defense Forces -- whose role had long been strictly defined as defense of the home islands -- will now be expanded to include overseas peacekeeping missions. Japan dispatched non-combat troops to Iraq from 2004 until earlier this year, but did so only after Koizumi won special authority from parliament.

The elevation to ministry status also paves the way for the passage of more specific laws that would give Japan greater flexibility to dispatch its forces to international hot spots. More importantly, it could open the door for a larger measure of logistical support by Japan in the event of a regional conflict. Such a move could change the balance of power in East Asia, empowering Tokyo, for instance, to assist the United States in the defense of Taiwan in the event of Chinese aggression. But officials here say it may yet take years before bills that would explicitly permit such actions are drafted and submitted to parliament.

Nevertheless, the upgrading of the defense agency underscores the increasing role of the military establishment in Japan, a nation that, under its pacifist constitution drafted by the United States following World War II, renounced the right to use force to settle international disputes. Japan has largely relied on its security alliance with the United States, which keeps some 50,000 troops in Japan, for deterrence.

But with concerns growing about regional security, particularly as a result of North Korea's pursuit of nuclear weapons, Japan has begun to shed its pacifist shell. Abe has called for the full redrafting of a new constitution that would allow Japan to officially possess a flexible military again.

The report described North Korea "as a serious threat, considering the serious nature of its nuclear test and threat of weapons of mass destruction," the ministry said in a statement.

North Korea stoked regional tensions in October when it conducted its first nuclear test, drawing U.N. sanctions and global condemnation.

Last year North Korea pledged to dismantle its nuclear program in exchange for security guarantees and aid. No progress has been made in implementing the agreement because of North Korea's objections to U.S. financial restrictions imposed on the communist regime for its alleged money laundering and counterfeiting.

During nuclear talks last week, North Korea continued to insist that the U.S. lift the sanctions before it would move ahead on dismantling its nuclear program.

The report said North Korea has the capability to launch a surprise attack on South Korea without repositioning its troops because it deploys about 70 percent of its ground forces south of the capital, Pyongyang.

North Korea "is consistently preparing for war for a long period and is likely to keep this military policy in the future," the report said.

North Korea often accuses South Korea of conspiring with the U.S. to attack it, an accusation denied by Washington.

South Korea is trying to strengthen its defense capability as it prepares to regain wartime operational control of its forces, which have been under the command of U.S.-led U.N. forces since the 1950-53 Korean War.

Seoul regained peacetime control of its troops in 1994, but the U.S. is still supposed to control South Korean forces if a war breaks out. South Korea and the U.S. agreed in October that Seoul will retake control of its troops sometime between 2009 and 2012.

South Korean President Roh Moo-hyun, who has pursued a foreign policy that is less dependent on Washington, called for the transfer of command, saying the move is long overdue.

About 29,500 U.S. troops are stationed in South Korea as a deterrent against the North. The presence of the troops is a legacy of the Korean War, which ended in a cease-fire rather than a peace treaty.

"The air force aims at speeding up its transition from territorial air defense to both offensive and defensive operations, and increasing its capabilities in the areas of air strike, air and missile defense, early warning and reconnaissance and strategic projection."

President Hu Jintao this week urged the building of a powerful Chinese navy that was prepared "at any time" for combat.

The report also defended China's rising military spending, pointing out that it spends less per capita than the United States, Britain, France or Russia and saying it was committed to peaceful development.

Describing China's general security situation as good, the 83-page document nonetheless wasted little time in denouncing Taiwan independence moves, saying the island over which Beijing claims sovereignty was a serious threat to regional stability.

"The struggle to oppose and control 'Taiwan independence' splittist forces and their activities is complex and grim," it said.

China and Taiwan have faced off since 1949 when Nationalist forces fled to the island after losing the Chinese civil war to the Communists.

Liu Te-shun, vice chairman of Taiwan's policy-making Mainland Affairs Council, said the release of the white paper raised China's military threat toward Taiwan and cast a cloud over the normalization of cross-strait ties.

"China's 2006 defense white paper still deliberately avoids the world's misgivings about its expanded military and the truthfulness of the increase of its national defense budget," Liu told a news conference in Taipei on Friday.

"It will only increase suspicion among the international community about the rise of China," he said.

Analysts said the report reflected China's primary goal of deterring both Taiwan independence and the prospect of U.S. intervention in the Taiwan Strait.

"China does not want to develop ... the kind of power projection capability that would match the United States in the long term," said Li Mingjiang, an assistant professor at the Singapore Institute of Defense and Strategic Studies.

"Its specific focus is on Taiwan, on the worst-case scenario for Taiwan moving toward independence, then declaring independence and U.S. intervention," he said.

The report also said China was facing threats from other, unnamed neighbors. "The issues of border complexities and sensitive historical problems still have an effect on China's security environment," it said.

China has fought brief border wars with India, Vietnam and the former Soviet Union, and continues to dispute the ownership of islets in the South China Sea with Vietnam, Taiwan, Malaysia, Brunei and the Philippines.

China also remains wary of Japan, which occupied parts of the country between 1931 and 1945 and which called on Beijing earlier this year to be more open about its military.

Japan's Kyodo news agency said on Friday that Tokyo held a joint navy exercise with Washington for the first time last month under the assumption that China had invaded the disputed Senkaku islands -- known as Diaoyus in China -- in the East China Sea.

The report also defended the rise in China's defense expenditure, officially projected to be some $36 billion in 2006, up about 15 percent from the previous year. Many foreign experts believe the real figure is significantly higher.

"This increase is to compensate for topping up basic defense weaknesses," it said.

(Additional reporting by Guo Shipeng and Lindsay Beck in Beijing, Lee Chyen Yee in Taipei and Chisa Fujioka in Tokyo)

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