YANGON (Reuters) - Myanmar's government on Friday suspended a controversial $3.6 billion, Chinese-led dam project, a victory for supporters of pro-democracy leader Aung San Suu Kyi and another sign of apparent reform in one of Asia's most repressive states.
After weeks of rare public outrage against the Myitsone dam, Myanmar's largest hydropower project, President Thein Sein told parliament his government had to act "according to the desire of the people," officials in parliament told Reuters.
Its construction has been "shelved" during the president's five-year term, one official said.
The dam was backed by hard-liners with ties to China and opposed by an increasingly vocal band of reformers. Some politicians appeared to fear they may not be re-elected if they defied public opinion and threw their support behind it, a sign democracy may be taking root after rare elections last year.
"It's very good of them to listen to the voice of the people," said Suu Kyi, who was released last year from 15 years of house arrest. "I welcome this."
She had said the dam threatened the flow of the powerful Irrawaddy River and warned that 12,000 people from 63 villages would have to be moved to make way for it. Many other sectors of society had also voiced opposition.
"This is President Thein Sein showing he can exercise his executive power and that he can stand up against China," said Aung Zaw, editor of the Irrawaddy magazine.
In his message to parliament, the president said "that his government, being born out of people's desire, has to act according to the desire of the people," said an official in parliament, who declined to be named because he was not authorized to speak to the media.
The will of the people was seldom considered under the military governments that made Myanmar one of Asia's most reclusive and repressive countries for almost 50 years.
The statement is one of many signs of change since the army nominally handed over power in March to civilians after elections in November, a process ridiculed at the time as a sham to cement authoritarian rule under a democratic facade.
Recent overtures by the government hint at possibly deeper changes at work -- from calls for peace with ethnic minority guerrilla groups to some tolerance of criticism and more communication with Nobel peace prize laureate Suu Kyi.
The United States, which has sought to encourage Myanmar's leaders to embark on a path of political reform with the promise of improved U.S. ties, said the dam decision was "a significant, positive step."
"We encourage the Burmese government to continue taking steps to respect and consider the interests of all of its people ... and we hope that this kind of positive progress can continue," State Department spokeswoman Victoria Nuland said.
The dam would have flooded an area about the size of Singapore, creating a 766-square-km (296-square-mile) reservoir, mainly to serve growing energy needs in northern neighbor China, which would have imported about 90 percent of its power.
In recent years, Myanmar's leaders have embraced investment from China as a deep and lucrative market for the former British colony's vast energy-related resources and to counterbalance the impact of Western sanctions imposed in response to human rights abuses.
But in recent weeks, the dam had become a symbol of resentment over China's growing influence and revealed a stark divide between Cabinet ministers and parliamentary leaders, making it the first real public test over whether reformers or hard-liners had more sway over the country's direction.
"It is a bold decision with the underlying message that we cannot kowtow to whatever China wants," said Aung Zaw of Irrawaddy magazine. "This could be another turning point for which direction Burma goes in the next decade."
The military junta proposed the dam in 2006 and signed a contract in 2009 with Myanmar's military-backed Asia World Company and China Power Investment Corp to build it.
Critics called that deal undemocratic, arguing it was agreed to without considering the views of the people. Those criticisms flared into the open recently, unthinkable for a government project just months ago, reflecting an easing of some controls on public expression in domestic media.
The dam, several years from completion, would have been built where the Mali and Nmai rivers form to become the Irrawaddy, which flows from northern Kachin state through half of the length of the country to the Andaman Sea, a national symbol and lifeline for millions of people.
Myanmar's ethnic Kachin, bordering China, have opposed the dam since 2007. Emotions over the project have spilled into violent skirmishes between the Myanmar military and the Kachin Independence Army, or KIA, since June.
An official at China Power Investment Corp declined comment. A Chinese Foreign Ministry official said he needed to look into the matter.
Danny Richards, senior Asia Editor at the Economist Intelligence Unit, said the suspension showed the new government was placing more value on the fallout from big infrastructure projects.
"However, it is only a suspension of the project, and it remains to be seen what pressure China may apply to ensure that the construction of the dam is completed," he said.
Richards said that of $20 billion in foreign investment projects approved by Myanmar's government in the 2010/11 fiscal year, Chinese and Hong Kong firms accounted for 70 percent.
"With few other sources of foreign investment -- the only other major investors are from Thailand and South Korea -- the new government will clearly not want to undermine its commercial ties with its northern neighbor," he said.
Additional reporting by Ben Blanchard in Beijing; Writing by Jason Szep,; Editing by Alan Raybould, Jonathan Thatcher and Peter Cooney