The State Department described as "welcome and constructive" Chen's proposal contained in a national day speech he made last Sunday.

He called for wide-ranging peace talks and a code of conduct with Beijing to reduce cross strait tension and defuse a military build-up on both sides of the Taiwan Strait.

But China poured cold water on any potential dialogue and rejected Chen's call, accusing him of cheating public opinion and risking "great catastrophe" if he pushed for Taiwan independence.

"We looked at the speech. We thought it was constructive," said State Department spokesman Richard Boucher, when commenting on the the Chinese reaction.

"We thought it was a welcome and constructive message that offered some creative ideas to reduce tension and resume cross-Straits dialogue," Boucher said.

He added that the United States would continue to urge both sides "to take the opportunity to engage in dialogue in order to resolve the differences peacefully."

China insists that before it embarks on any negotiations with the island, Taiwan leaders must accept the "one China principle" which defines Beijing as the sole legitimate government of all China including Taiwan.

Chen plans to enact a revised constitution in 2008, a move that China fears will lead to a more formalized break with the mainland.

China has been ramping up military spending for over a decade in an attempt to change the strategic balance in the Taiwan Strait. It already has over 600 ballistic missiles pointed at the island and is adding 60 to 70 new missiles each year.

The United States remains the leading arms supplier to Taiwan, even though it moved diplomatic recognition from Taipei to Beijing in 1979.

Despite its legal obligation to provide weapons to Taiwan, Washington acknowledges Beijing's position that Taiwan should be considered an integral part of China.

Boucher also responded to allegations that Taiwan could have been involved in experiments to manufacture nuclear weapons, saying Washington would leave it to the International Atomic Energy Agency (IAEA) to look into the matter.

According to reports, the agency had found samples indicating plutonium experiments carried out on the island two decades ago.

The reports suggested that the experiments were part of a nuclear weapons development which was scrapped shortly afterwards.

"As far as the question of Taiwan's nuclear activity, I think you're dealing with reports about things that happened in the 1970s and 1980s," Boucher said, noting that the agency was currently looking into the issue.

He pointed out that it was known that in the 1970s, Taiwan worked under IAEA supervision and safeguards on plutonium at some point.

"At this point, I think it's in the hands of the IAEA to look at this, look at the history, and we'll see what they report to the Board of Governors, if anything," Boucher said.

Taiwan's atomic officials have denied developing such weaponry 20 years ago.

"To comply with international treaties, we have made it clear that we will never develop, use or store nuclear weapons or related items," military spokesman Hang Suey-sheng told AFP in Taipei.

Source: AFP