(Corrects Kaohsiung mayor to Chen on second reference)
* China angered by U.S. law on exchanges with Taiwan
* Self-ruled Taiwan one of China's most sensitive issues
* Taiwan says can protect its "sovereign dignity"
By Philip Wen and Ben Blanchard
BEIJING, March 20 (Reuters) - Chinese President Xi Jinping told self-ruled Taiwan on Tuesday that it would face the "punishment of history" for any attempt at separatism, offering his strongest warning yet to the island claimed by China as its sacred territory.
The government of Taiwan, one of China's most sensitive issues and a potentially dangerous military flashpoint, responded that it hoped China could "break free" of the old clichés of threats and force.
China's hostility towards Taiwan has risen since the 2016 election of President Tsai Ing-wen, a member of the island's pro-independence Democratic Progressive Party.
China suspects Tsai wants to push for formal independence, which would cross a red line for Communist Party leaders in Beijing, though Tsai has said she wants to maintain the status quo and is committed to ensuring peace.
China has been infuriated by U.S. President Donald Trump's signing into law last week legislation that encourages the United States to send senior officials to Taiwan to meet Taiwanese counterparts, and vice versa.
The United States does not have formal ties with Taiwan but is required by law to help it with self-defence and is the island's primary source of weapons.
Xi told the 3,000-odd delegates at the annual session of parliament that China would push for the "peaceful reunification of the motherland" and work for more Taiwanese to enjoy the opportunities of its development.
"It is a shared aspiration of all Chinese people and in their basic interests to safeguard China's sovereignty and territorial integrity and realise China's complete reunification," he said.
"Any actions and tricks to split China are doomed to failure and will meet with the people's condemnation and the punishment of history," he added, to loud applause.
China has the will, confidence and ability to defeat any separatist activity, Xi said.
"The Chinese people share a common belief that it is never allowed and it is absolutely impossible to separate any inch of our great country's territory from China," he said.
In Taiwan, the China policy-making Mainland Affairs Council said the government was firm in its conviction to protect Taiwan's "sovereign dignity" and the well-being of its people.
"We also hope that mainland China's leaders, at this time of entering into a new administration period, can break free of clichéd thinking of strong intimidation," it added.
In a visit likely to further irritate China, U.S. Deputy Assistant Secretary of State Alex Wong is in Taiwan this week.
A State Department spokeswoman said Wong would deliver remarks at the American Chamber of Commerce and hold talks with Taiwanese authorities.
"His visit will reaffirm long-standing U.S. policy toward and support for Taiwan," the spokeswoman, Grace Choi, said while stressing that it was not a response to the congressional bill.
"Mr. Wong's trip has been planned for some time," she said, adding that more senior U.S. officials visited Taiwan in 2016 and 2015.
A key ally of Tsai Ing-wen, Kaohsiung mayor Chen Chu, spoke at the Center for Strategic and International Studies in Washington on Tuesday and urged greater international support for Taiwan, while calling for better communication with China.
"I don't think the two sides should continue to provoke each other," she said. "I hope we will have a better understanding of each other; we want to find common ground."
A U.S. State Department official said Washington urged Taipei and Beijing to engage in constructive dialogue to resolve their differences.
Chen, who worked as Tsai's campaign manager for her 2016 election, also welcomed the passage of the Taiwan bill and the opportunity for high-level visits between Taiwan and the United States.
She said she had yet to meet anyone from the U.S. administration during her visit. "If I have the luck or the fortune to meet anyone, that's great," she said.
Taiwan has thanked the United States for the law and its support, but its Foreign Ministry said on Monday there were no plans for any senior leaders, such as the president, to visit the United States.
China has also been worried about independence activists in the former British colony of Hong Kong following big street protests there in 2014 calling for universal suffrage.
Xi said China would uphold Hong Kong's high degree of autonomy but would also seek to increase "national consciousness and patriotic spirit" in the financial centre.
Taiwan has shown no interest in being run by China and has accused China of not understanding how democracy works, pointing out that Taiwan's people have the right to decide its future.
Chen said Taiwan's democracy was an inspiration to young people in Asia and it could play a huge role in the region's democratic development. "Taiwanese values are the new Asian values," she said.
The new U.S. law on Taiwan adds to strains between China and the United States over trade, as Trump has enacted tariffs and called for China to reduce its huge trade imbalance with the United States, even while Washington has sought Beijing's help to resolve tension with North Korea.
While stepped-up Chinese military exercises around Taiwan in the past year have rattled Taiwan, Xi reiterated China's assertion that its rise was not a threat to any country, though China considers Taiwan to be merely a Chinese province and not a nation.
"Only those who are in the habit of threatening others will see everyone else as a threat," Xi said. (Additional reporting by Stella Qiu and Christian Shepherd in BEIJING, Twinnie Siu and Fabian Hamacher in TAIPEI and David Brunnstrom in WASHINGTON; Writing by Ben Blanchard Editing by Robert Birsel, Clarence Fernandez and Leslie Adler)
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