China denounced on Friday a Pentagon report that warned its military modernisation could destabilise the region, saying the U.S. military's annual assessment of Beijing's armed forces indulged in exaggeration and 'groundless suspicion.'

Beijing and Washington have sought to rein in their quarrels this year, and a recent visit to China by Vice-President Joe Biden brought vows of cooperation and goodwill.

But military wariness between the two powers remains a source of tension, and China's blunt response to the U.S. Defense Department report once again underlined that.

"China expresses its strong dissatisfaction and resolute opposition," the Chinese Ministry of Defense said in comments faxed to Reuters about the Pentagon report, which said Beijing appeared to be on track to forge a modern military by 2020.

"As technology advances, it is very normal for the Chinese military to develop and upgrade some weapons and armaments," it added, in Beijing's first high-level response to the report.

The U.S. Defense Department's annual assessment on Chinese military strength raised concerns about Beijing's growing might, including its widening edge over Taiwan, the self-ruled island that Beijing deems an illegitimate breakaway province.

It cited China's launch of an anti-ship ballistic missile, work on an embryonic aircraft carrier program and development of a prototype of China's first stealth fighter jet, which was publicly unveiled in January during a visit to Beijing by then Defense Secretary Robert Gates.

It also said cyber attacks in 2010, including those on U.S. government computers, appeared to have originated in China.

The Chinese defense ministry countered that the Pentagon report, released on Wednesday, "exaggerated the so-called mainland military threat to Taiwan."

The U.S. report "engaged in groundless suspicion about China's out-space and Internet security policies," said the Chinese defense ministry.

"The U.S. report grievously distorts the facts, and is entirely incapable of standing up to scrutiny," it said.

Defense budget

China put its defense budget for 2011 at 601.1 billion yuan ($91.5 billion), an increase of 12.7 percent on the allocation for 2010. But many experts believe China's actual spending on the 2.3 million-strong People's Liberation Army is much higher than what the government reports.

China launched its first carrier, a refitted and unfinished former Soviet craft, for a maiden run earlier this month.

The Pentagon rolled out a record base budget for fiscal year 2012 of $553 billion, up $22 billion from the level enacted for 2010.

The tiff over the Pentagon's report on China's military is, however, an annual ritual and is unlikely on its own to unsteady broader relations.

But Taiwan remains one the biggest irritants in Sino-American ties, despite a cooling of tensions between the two sides of the Taiwan Strait.

The People's Liberation Army curbed military ties with the United States for much of 2010 over U.S. arms sales to Taiwan, and Beijing has warned that engagement with Washington could again be damaged by any new U.S. arms sales to the island.

Michael Schiffer, a U.S. deputy assistant secretary of defense, said the Obama administration has not yet made a decision on any new arms sales to Taiwan.

People familiar with the matter told Reuters earlier this month that the U.S. sale of 66 new Lockheed Martin F-16 C/D fighter jets to Taiwan appeared unlikely, although no final decision had been reached.