* Vietnam looks isolated in South China Sea dispute
* Territorial tensions flare up in region
* Both sides seen as reluctant to back down
* Hanoi likely to raise issue at weekend ASEAN summit
By Greg Torode and Charlie Zhu
HONG KONG, May 9 (Reuters) - China's decision to park its biggest mobile oil rig 120 miles off the Vietnamese coast has exposed how vulnerable Hanoi, and other littoral states of the South China Sea, are to moves by the region's dominant power to assert its territorial claims.
The Communist neighbours are at loggerheads over the drilling rig in contested waters, each accusing the other of ramming its ships in the area in the worst setback for Sino-Vietnamese ties in years.
While Hanoi's dispute with Beijing over the Spratly Islands, for example, involves fellow claimants the Philippines, Malaysia and Brunei, it is only Vietnam that contests China's expanding occupation of the Paracels.
For years now Hanoi has tried to open talks with Beijing over China's moves on the islands, insisting that they are Vietnamese territory.
While the countries have put aside historic suspicions in recent years to demarcate their land border and the Gulf of Tonkin, negotiations stop dead at the Paracels further south.
Whenever the Vietnamese raise the issue, the Chinese say there is nothing to discuss because the Paracels are under Chinese occupation and sovereignty and not in dispute, according to diplomats close to regular Sino-Vietnamese negotiations.
And although officials on both sides now say they want talks over the intensifying stand-off at sea, where dozens of rival patrol ships flank the rig, the Chinese are determined to keep the question of sovereignty off the table.
Wu Shicun, president of the National Institute for South China Sea Studies, a Chinese government think-tank, said Beijing was not about to back down over what it calls the Xisha islands.
"I think China will keep moving ahead with its plan (in Xisha), no matter what Vietnam says and does," Wu told Reuters.
Chinese oil industry sources say hydrocarbon reserves under the rig's current location remain unproven, and point to political, rather than commercial, interests driving its placement on May 2 by China's state-run oil company CNOOC.
Much of the South China Sea is considered potentially rich in oil and gas, but it remains largely unexplored.
"WORST FEARS" REALISED
Hanoi strategists have been closely watching the construction and initial deployments of the rig, HD-981, over the last two years.
"It's been one of our worst fears that it would eventually be used against us," said one Vietnamese diplomat. "But the timing has caught us by surprise."
Vietnamese diplomats say they will be pushing for support when regional leaders gather in Myanmar for a weekend summit of the Association of Southeast Asian Nations (ASEAN).
But analysts say there is no guarantee of long-term regional or international support for Vietnam, even as the U.S. slams China's "provocative" act and urges Sino-Vietnamese negotiations on sovereignty.
Vietnam has a range of budding military relationships, including with the United States, but it has rejected formal alliances, unlike Japan and the Philippines, long-time Washington allies locked in their own worsening territorial disputes with China.
"China does seem to have moved at the point of maximum vulnerability for Vietnam," said Carl Thayer, an expert on the South China Sea at the Australian Defence Force Academy.
"There is a risk some other countries will simply say it is not their problem," he said. "The Paracels (are) not the Spratlys."
Ian Storey, a Singapore-based regional security analyst, said he did not believe Vietnam was in any mood to back down either, despite the pressures of facing its historic foe.
"We can anticipate several more months of high tensions, which I believe could lead to the most serious crisis in Sino-Vietnamese relations since the 1979 border war," said Storey, of Singapore's Institute of Southeast Asian Studies.
Storey added that there was no easy path for negotiations to sort out overlapping exclusive economic zones (EEZs), as China and Vietnam have done in the Gulf of Tonkin - one theoretical way out of the current crisis.
"It is a quite a legal knot."
Vietnam formally protested over China's placement of the rig, saying it was 120 nautical miles from its coast and within its EEZ under the UN Convention on the Law of the Sea.
The convention gives countries the right to fish and tap oil and gas resources within such a zone, which must remain otherwise open to international shipping, including warships.
China's Foreign Ministry spokesman responded by saying that the rig was "completely within the waters of China's Paracel Islands", while Chinese analysts noted it was within 17 miles of the southwestern Paracel island of Triton.
International legal experts said the problem of overlapping zones was just one of many legal complications in the Paracels saga, reflecting a tangled Cold War history.
Whatever strengths either China or Vietnam bring to their claims, each has flaws too, some dating back to China's occupation of the islands in 1974, according to international lawyers.
Vietnamese officials have recently sought advice from international legal scholars about joining a United Nations arbitration case brought by the Philippines against China's claims in the South China Sea.
But Vietnamese strategists have yet to show full trust in the international legal system, and have expanded Hanoi's military strength in recent years, including purchasing state-of-the-art warships and Kilo-class submarines from long-time patron Russia.
The goal, military officials have said, is not to try to compete with China's military, but to deter Beijing from using force. They say they will not fire first, but are prepared to fire back.
Tran Cong Truc, a former head of Vietnam's border committee, said Vietnam was a "peace-loving country, but don't wake the dragon". (Additional reporting by Florence Tan in Singapore and Nguyen Phuong Linh in Hanoi; Editing by Mike Collett-White)
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