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(Adds Chinese defense ministry response)

The Pentagon's estimate, using 2013 prices and exchange rates, was 21 percent above the $119.5 billion figure announced by China. It was detailed in an annual report to Congress that cited steady progress in Chinese defense capabilities.

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China claims almost the entire oil and gas rich South China Sea and dismisses competing claims from Taiwan, Brunei, Vietnam, the Philippines and Malaysia. Japan also has a territorial dispute with China over islands in the East China Sea.

of China's normal defense and military building, exaggerating the 'China military threat', which is totally wrong," it said. report, we are currently assessing it, and will react further, depending on the situation."

"China's military investments provide it with a growing ability to project power at increasingly longer ranges," the report said.

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The Pentagon report renewed warnings over cyber intrusions.

Chinese military spending exceeds

It noted that in September 2013, a "probable" Chinese drone was noted for the first time conducting reconnaissance over the East China Sea. China also unveiled details of four drones under development in 2013, including the Lijian, China's first stealth drone, it said. (Additional reporting by Ben Blanchard in BEIJING; Editing by David Storey, Grant McCool and Clarence Fernandez)

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metal and solar companies to steal trade secrets, ratcheting up tensions between the two world powers over cyber espionage.

By Phil Stewart

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WASHINGTON, June 5 (Reuters) China's military spending exceeded $145 billion last year as it advanced a program modernizing an arsenal of drones, warships, jets, missiles and cyber weapons, the Pentagon said on Thursday, offering a far higher figure than Beijing's official tally.

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It acknowledged that estimating Chinese spending can be difficult, in part because of "poor accounting transparency and incomplete transition from a command economy."

The report came just days after Defense Secretary Chuck Hagel, using unusually strong language, accused Beijing of destabilizing the region in pursuit of territorial claims.

The 96 page report said China was placing emphasis on preparing for potential contingencies in the South and East China Seas, noting an October drill named Maneuver 5 in the Philippine Sea.

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China's Defense Ministry, in a statement on its website, said it was "resolutely opposed" to the Pentagon report.

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The drill, the Pentagon said, was the largest Chinese Navy open ocean exercise seen to date.

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