* China plan could undermine confidence in East Asia - ASEAN
* China says pays great attention to freedom of navigation
* South China Sea is Asia's biggest potential military trouble spot
* Competing claims make South China Sea difficult issue for ASEAN
By Matthew Bigg
JAKARTA, Nov 30 (Reuters) - China's plan to board and search ships that illegally enter what it considers its territory in the disputed South China Sea could spark naval clashes and hurt the region's economy, Southeast Asia's top diplomat warned on Friday.
Seeking to ease alarm over the issue, China said it attached "great importance" to freedom of navigation in waters that have some of the world's busiest shipping lanes.
New rules that take effect on Jan. 1 will allow police in the southern Chinese province of Hainan to board and seize control of foreign ships which "illegally enter" Chinese waters, the official China Daily said on Thursday.
Surin Pitsuwan, secretary-general of the Association of Southeast Asian Nations (ASEAN), said the Chinese plan was a "very serious turn of events".
"It certainly has increased a level of concern and a level of great anxiety among all parties, particularly parties that would need the access, the passage and the freedom to go through," Surin told Reuters by telephone from Thailand.
Using unusually strong language, Surin said the plan could trigger a major incident that would affect confidence in East Asia, a key engine of global economic growth.
Several countries have overlapping sovereignty claims in the South China Sea, which is believed to be rich in oil and gas. It is the region's biggest potential military flashpoint.
A summit of Asian nations this month was overshadowed by disagreements between China and the Philippines over the dispute. Tensions were fanned again by China's move to issue new passports containing a map of its maritime claims.
Chinese Foreign Ministry spokesman Hong Lei declined to elaborate on the new rules at a briefing in Beijing on Friday and what might constitute illegal entry.
"All countries have freedom of navigation in the South China Sea in accordance with international law ... At present there are no problems in this regard," he said, adding Beijing wanted to resolve the dispute with neighbouring countries through negotiations.
Asked on Thursday about the police boarding plans, Hong said that management of the seas according to the law was "a sovereign nation's legitimate right".
China has said previously it will respect freedom of navigation in the South China Sea and that it has no intention of trying to restrict access.
In Washington, U.S. military officials said the China Daily report mentioned only police in Hainan province, not military forces, so the intended scope of the policy was unclear. Hainan's policy was unlikely to affect the behaviour of U.S. vessels operating in international waters, said the officials.
The United States has been refocusing its military attention on Asia, emboldening its long-time ally the Philippines and former foe Vietnam to take a tougher stance against Beijing.
China claims virtually the entire South China Sea. ASEAN members the Philippines, Vietnam, Brunei and Malaysia claim various parts, as does Taiwan.
The territorial wrangle is a challenge to Southeast Asia, exposing how deeply its nations have been polarised by China's expanding economic and political influence in the region.
Tensions over the sea have simmered for decades but now it was difficult for ASEAN members to unite because they had competing claims, said Richard Bitzinger, senior fellow at the S. Rajaratnam School of International Studies in Singapore.
"The Chinese have painted themselves into a corner with the South China Sea issue by raising it to a fundamental issue of national sovereignty on a par with Tibet or Taiwan that makes compromise difficult," Bitzinger said.
Philippine President Benigno Aquino said he had asked his foreign minister to verify the plan and that, if confirmed, Manila would lodge a diplomatic note or formal protest.
China's move would be difficult to implement because it runs counter to the United Nations Convention on the Law of the Sea, Aquino said.
"We might accelerate and bring it before the appropriate international tribunal to finally settle the matter or at least start the process of settling it legally and concretely," he told reporters on the central Philippine island of Cebu.
Thailand wanted an atmosphere conducive to cooperation, said Arthayudh Srisamoot, director-general of the Department of ASEAN Affairs at the Ministry of Foreign Affairs in Bangkok.
"It does not want the current situation to deteriorate and wants to see both sides continue with talks," Srisamoot said.
Analysts said the plan to board ships would be hard to implement under international law and could backfire economically for China.
"Chinese provocation by boarding foreign vessels would roil global financial markets, add to global economic uncertainty, and impact global trade that would impact China as well," said Scott Harrison, managing director of Pacific Strategies and Assessments in Manila.
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