Myanmar freed at least 200 political prisoners on Friday in an amnesty that prompted the United States to upgrade diplomatic relations as one of the world's most reclusive states opens up after half a century of authoritarian rule.

The move by Myanmar could embolden the opposition and put pressure on the West to lift sanctions. Among those freed are long-persecuted democrats and ethnic leaders whose proven ability to organise and inspire could increase pressure on President Thein Sein to accelerate nascent reforms.

In Washington, Secretary of State Hillary Clinton said the United States was ready to begin the process of exchanging full ambassadors after an absence of two decades, and would consider additional measures if the new civilian-led government's reforms continue.

The United States and Europe have said freeing political prisoners is crucial to even considering lifting the economic sanctions that have isolated the former British colony, also known as Burma, and pushed it closer to China during five decades of often-brutal military rule that ended last March.

U.S. President Barack Obama called the release a substantial step forward in the Asian country's democratic reforms. Much more remains to be done to meet the aspirations of the Burmese people, but the United States is committed to continuing our engagement, Obama said in a statement.

As big as France and Britain combined, Myanmar lies between India, China and Southeast Asia with ports on the Indian Ocean and Andaman Sea, all of which make it an energy security asset for Beijing's landlocked western provinces and a U.S. priority as Obama strengthens engagement with Asia.

Its resources include natural gas, timber and precious gems. Myanmar is building a multibillion-dollar port through which oil can reach a 790-km (490-mile) pipeline under construction with Chinese money and workers.

It was unclear exactly how many political detainees were among the 651 inmates covered by the amnesty, the second ordered by authorities in four months. About 230 political detainees were released in an earlier general amnesty on October 12.

The Assistance Association for Political Prisoners (Burma), a group that tracks prisoners, said at least 200 had been freed on Friday. These included Min Ko Naing and other members of the 88 Generation Students Group, who led a pro-democracy uprising in 1988 when thousands of protesters were killed.

Also freed was Shin Gambira, a Buddhist monk who led 2007 street protests crushed by the army. He was 27 years old when sentenced to 68 years in prison in 2007. Khin Nyunt, the once-powerful chief of military intelligence (MI), was also released from house arrest.

Appointed prime minister in 2003, he ushered in a then-derided seven-point roadmap to democracy but was purged a year later in circumstances that were never explained. He had been under house arrest ever since.

Speaking to reporters outside his home in Yangon, Khin Nyunt expressed hope for the country, citing recent meetings between the president and opposition leader Aung San Suu Kyi, and visits by dignitaries such as Clinton, who last month became the first U.S. secretary of state to visit Myanmar in 50 years.

'GOOD SIGNS'

These are good signs, he said, after stressing he had no plans to return to government. I'm not going into politics.

Sai Nyunt Lwin, 60, a prominent ethnic Shan politician, said he and all other leaders of his former Shan Nationalities' League for Democracy (SNLD) were freed.

U.N. Secretary-General Ban Ki-moon also welcomed the prisoner release, calling it the most significant to date, and called on the international community to respond by helping build conditions for sustaining the reform process.

The release of all political prisoners is a longstanding demand of the international community and I warmly welcome these releases as a further demonstration of the Burmese government's commitment to reform, British Foreign Secretary William Hague said in a statement.

The amnesty is a gamble for Thein Sein, a former general.

Freed dissidents will no doubt strengthen Suu Kyi's movement, but there are also concerns some could push for changes more radical than the government and Suu Kyi want.

Suu Kyi, a 1991 Nobel Peace Prize-winner released in 2010 from 15 years of house arrest, will run in a by-election for parliament in April and has said she trusts the new nominally civilian government that replaced the junta last March.

The United States downgraded its diplomatic representation in Myanmar to charge d'affaires following the military coup in 1988 and a violent crackdown on pro-democracy protests in the country.

Clinton, citing progress on a number of fronts, said the next step was to identify a candidate to return to Myanmar as the U.S. ambassador.

This is a lengthy process, and it will, of course, depend on continuing progress and reform. But an American ambassador will help strengthen our efforts to support the historic and promising steps that are now unfolding, Clinton said.

On Thursday, the government signed a ceasefire with ethnic Karen rebels to try to end one of the world's longest-running insurgencies, although fighting still rages with ethnic Kachins in the north. The government has also some eased media controls.

The government should ensure that there are no obstacles to these activists participating in public life and upcoming elections, rights group Human Rights Watch said in a statement. It called for international monitors to be allowed in to account for political prisoners that might still be behind bars.

The exact number of political prisoners remains unclear.

Rights groups and the United Nations have put it at about 2,100. But Minister for Home Affairs Lieutenant General Ko Ko told U.N. Special Rapporteur Tomas Ojea Quintana in August the number was 600, or about 400 after the October 12 amnesty.

Suu Kyi's National League for Democracy put the total on Friday at about 500. It provides help to more than 460 people it considers prisoners of conscience, said Naing Naing, the party official in charge of assistance. There were a few dozen more who did not seek its help, he said.

(Additional reporting by Andrew Quinn in Washington; Writing by Alan Raybould; Editing by Jason Szep and Will Dunham)