* Japan's security environment worsening - Defence Ministry report
* Japan calls China's handling of maritime disputes "high-handed"
* North Korea could resort to graver provocation - report (Adds China reaction)
By Kiyoshi Takenaka
TOKYO, Aug 5 (Reuters) - Japan finds itself in a worsening security environment as North Korea pushes ahead with missile development and China and Russia step up military activity in the region, Japan's Defence Ministry said on Tuesday.
The ministry's annual white paper comes after intermittent testing by North Korea of ballistic missiles in defiance of a U.N. ban, and a record number of scrambles by Japanese fighter jets in April-June due to increased flights by Chinese and Russian planes close to Japan's air space.
"With a trend toward arms buildup and modernisation, and brisker military activity by neighbouring countries getting prominent, security challenges and destabilising factors for Japan and the rest of the Asia-Pacific are becoming more serious," the ministry said in the paper.
Prime Minister Shinzo Abe returned to power in December 2012 intent on easing the limits of a post-war pacifist constitution on the military to let Japan play a bigger global security role.
Abe's government this year took some historic steps away from Japan's post-war pacifism by easing weapons export restrictions and ending a ban that has kept the military from fighting abroad.
The moves have been viewed warily elsewhere in Asia, in particular in China. Ties between China and Japan were already strained by a territorial dispute over a group of tiny East China Sea isles as well as rows over the legacy of Japan's wartime aggression. Patrol ships from both countries routinely shadow each other near the islands, stoking fear of clashes.
Recently, however, Abe has renewed a call for a bilateral summit with Chinese President Xi Jinping. The two governments are trying to arrange a summit on the sidelines of a Pacific Rim conference in Beijing in November, the Nikkei newspaper said on Monday.
The ministry's report described China's action in maritime disputes as "high-handed" and called on China to observe international norms.
In November, China launched an air defence identification zone covering a swath of the East China Sea, including the disputed isles, and warned it would take "defensive emergency measures" against aircraft that failed to identify themselves.
"These are very dangerous measures that could lead to the unilateral change of the status quo in the East China Sea, escalation of the situation, and some unexpected development," the ministry said. "We are deeply concerned."
China's defence budget soared fourfold over the past decade to 808 billion yuan ($131 billion), while Japan's defence spending dipped by 1.9 percent over the same period to 4.78 trillion yen ($47 billion), the ministry said.
China's Defense Ministry said Japan was exaggerating the threat posed by its military spending to justify its own build-up, adding it was assessing the white paper.
"Japan ignores the facts, makes unreasonable criticism of China's military development ... and deliberately embellishes the China threat as an excuse to adjust its military and security policies and expand arms manufacturing," the ministry said in a statement on its website.
Japan and the United States are set to revise cooperation guidelines by the end of the year to reflect the changing security environment and better respond to threats in such areas as space and cyber space.
Japan's Defence Ministry called North Korea's missile and nuclear programmes a "grave destabilising factor" and warned that progress in the projects could embolden the North to resort to more provocation.
"If North Korea extends the range of ballistic missiles further, reduces the size of nuclear arms and turns them into warheads, the country could come to believe it has secured strategic deterrence against the United States," it said.
There is a possibility that the advanced version of North Korea's Taepodong-2 ballistic missiles, when fitted with a warhead weighing less than one tonne, could have a range of more than 10,000 km (6,200 miles), covering part of the continental United States, the ministry said.
Japan is also keeping a wary eye on Russia's involvement in turmoil in Ukraine, where Moscow annexed the Black Sea peninsula of Crimea in March.
"This change to the status quo by Russia, with force in the background, is a global issue that affects the entire international society," it said.
Any attempt to change the status quo by force makes Japan nervous as China challenges Japan's control over the East China Sea islets, known as the Senkaku in Japan and Diaoyu in China.
The ministry also touched upon another set of small islands, controlled by South Korea but claimed by Japan, saying they were Japan's inherent territory. The islets are called the Takeshima in Japanese and Dokdo in Korean.
That assertion drew an angry reaction from South Korea, which called the claim "preposterous". Its Defence Ministry summoned the Japanese military attache to protest.
"The Japanese government should bear in mind that as long as it continues its unjust claim over Dokdo, the road to improving ties between the two countries can only be a long one," South Korea's Foreign Ministry said in a statement. (Additional reporting by Jack Kim in Seoul and Michael Martina in Beijing; Editing by Linda Sieg, William Mallard, Robert Birsel)