BEIJING/WASHINGTON - Chinese state media blasted the United States on Monday for a planned $6.4 billion arms package for Taiwan but U.S. officials said they hoped the flap would be temporary and not derail cooperation.

The arms sales, the latest by the United States but the first by the Obama administration, has added to a litany of strains between the world's biggest and third-biggest economies, including the value of China's currency, trade protectionism, Internet freedoms and Tibet.

The official China Daily said U.S. weapons sales to the self-ruled island, which China claims as its own, inevitably cast a long shadow on Sino-U.S. relations.

China's response, no matter how vehement, is justified. No country worthy of respect can sit idle while its national security is endangered and core interests damaged, the English-language newspaper said in an editorial.

White House spokesman Robert Gibbs said the U.S.-China relationship was important and I don't think that either country can afford to simply walk away from the other.

Gibbs said any sanctions against the companies involved in the arms sales, a move threatened by China for the first time, would not be warranted.

The United States switched diplomatic recognition from Taipei to Beijing in 1979, recognizing one China, and says it wants the two sides to settle their differences peacefully. The United States remains Taiwan's biggest backer and is obliged by the 1979 Taiwan Relations Act to help in the island's defense .

State Department spokesman P.J. Crowley said the arms sale decision reflected long-standing commitments to provide for Taiwan's defensive needs.

We will, as always, pursue our interests but we will do it in a way that we think allows for positive and cooperative relations with China, he told reporters.
U.S. Defense Secretary Robert Gates defended the arms sale, telling reporters he hoped China's decision to protest by curtailing bilateral military contacts would be temporary and that he still planned to visit China later this year.

Stability is enhanced by contact between our military and a greater understanding of each other's strategies, so I hope that if there is a downturn, that it will be a temporary one and that we can get back to strengthening this relationship, Gates said.

MISSILE BUILDUP CONCERNS

The Pentagon's 2010 Ballistic Missile Defense Review Report to Congress, published on Monday, said the United States was concerned and closely monitoring China's missile buildup and increasingly advanced capabilities in the Pacific region.

One regional trend that particularly concerns the United States is the growing imbalance of power across the Taiwan Strait in China's favor, the report said.

The report said U.S. defense policymakers remain committed to a relationship that is positive, cooperative, and comprehensive and do not believe a hostile or adversarial relationship with China is by any means inevitable.

Beijing considers Taiwan a breakaway province that must accept eventual unification, by force if necessary. China's ruling Communist Party controls the country's media and uses them at sensitive times to amplify its message.

Venting intense anger over the arms sales, Chinese Internet users called for a boycott of top U.S. exporter and plane-maker Boeing Co and other companies supplying parts.
China has for years opposed U.S. defense sales to Taiwan, which has been separated from mainland rule since 1949 and was a Japanese colony from 1895 to 1945.

But for the first time, Beijing sought to pressure the United States by threatening to formally punish companies whose arms are involved in the arms package, which was announced on Friday.

China has no room whatever for compromise on this issue, said a commentary in the Liberation Army Daily, the mouthpiece of the country's military, adding that Chinese armed forces were ready for resolute struggle over Taiwan.

It is entirely reasonable to impose corresponding sanctions on U.S. companies involved in arms sales to Taiwan.

U.S. arms exporters declined to comment on the Chinese threat and White House spokesman Gibbs said: I don't think those (sanctions) would be warranted.

Walter Lohman, director of Asian studies at the Heritage

Foundation, said China's response was mostly noise and probably designed to deter Washington from considering selling F-16 advanced fighter jets to Taiwan.

Partly what they're doing now is trying to scare us off the F-16 sale, by making a big deal out of this one, he said.

CHINESE FACE LIMITED OPTIONS

Chinese shares appeared unmoved but trading in offshore one-year dollar/yuan non-deliverable forwards (NDFs) implied slightly slower appreciation for the yuan over the next 12 months.

Dealers said the NDFs shift was mainly driven by the dollar's global strength but the Sino-U.S. tension contributed.

China's top leaders, President Hu Jintao and Premier Wen Jiabao, have not publicly commented on what they have said is their nation's topmost issue, suggesting they want to keep some leeway in dealing with Washington.

Despite Beijing's strident words, options for punishing the United States were limited, said Drew Thompson, director of China Studies at the Nixon Center, a thinktank in Washington.

They don't have a lot of leverage, and that's a source of frustration for them, he said. It's hard to picture what they could do that's anything other than symbolic.

Sanctions on Boeing could give its rival, Airbus, more leverage in negotiations with Chinese buyers, Thompson said.

U.S. officials have said Taiwan, which lags China in the balance of military power, needs updated weapons to give it more sway with Beijing, which Taiwan says has more than 1,400 short- and mid-range missiles aimed at the island.

Beijing would postpone or partially halt some military contacts with the United States, including visits planned for this year such as Gates's trip, Xinhua news agency said.
China also said the dispute will damage cooperation with the United States over international issues. Washington has sought stronger Chinese support over several hotspots, chiefly the nuclear ambitions of Iran and North Korea.

It's difficult to take what are global problems and use them as a tool to vent frustration over a bilateral issue, Thompson said of China's options. They risk isolating themselves pretty badly.

(Additional reporting by Chris Buckley in Beijing; Lu Jianxin in Shanghai; Yoko Kubota in Tokyo; Adam Entous, Jim Wolf, Arshad Mohammed and Ross Colvin in Washington; Editing by John O'Callaghan)

China