Chen made the announcement during a flight to Panama for an official visit, a presidential official told AFP.

The live-fire "Han Kuang 20" military drill, the largest exercise planned this year, had been cancelled "to show Taiwan's utmost goodwill," Chen told reporters aboard the plane, according to a television broadcast Tuesday.

"I feel this is very important because we look forward to creating a win-win (situation) for both sides across the Taiwan Strait based on the principle of peace," Chen said.

The defense ministry said "canceling of the show of force would be conducive to the easing of tensions caused by the recent spate of military drills separately held by the two sides."

Tensions between Taiwan and China have risen since Chen, from the pro-independence Democratic Progressive Party, was re-elected in March. China has reiterated its vow to take Taiwan by force if the island declares independence.

Since then it has staged war games and Taiwan's armed forces have conducted a series of maneuvers aimed at deterring an invasion.

Local newspapers reported Monday that China has cancelled a military exercise on Dongshan Island near Taiwan, withdrawing some 3,000 troops in a move which Taiwan defense authorities described as "abnormal."

"It cannot be ruled out that it was a gesture of goodwill," Defense Minister Lee Jye told reporters.

But Lee still warned about the threat from China and urged Taiwanese to support a controversial arms acquisition package.

"We have no intention of engaging in an arms race with the Chinese communists. Only strength would be the guarantee of our security," he said.

Taiwan's cabinet has approved plans to spend 610 billion Taiwan dollars (18.2 billion US) on weaponry -- including eight US-built submarines, Patriot anti-missile systems and submarine-hunting P-3C aircraft -- over a 15-year period from 2005.

The deal will go to parliament for approval towards the end of the year.

The defense ministry said the number of Chinese ballistic missiles targeting Taiwan would increase to 800 by the end of 2006.

China has long considered Taiwan part of its territory to be reunified, by force if necessary. The two sides split in 1949 at the end of a civil war.

Chen left for Panama Monday night to attend the inauguration of his counterpart Martin Torrijos. He will also visit Belize during the trip and make brief stops in Honolulu and Seattle for refuelling.

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