* Taiwanese-held island the most strategic asset in Spratlys
* Itu Aba island has airstrip, fresh water supplies
* Major upgrade to be finished by end of 2015
* China unfazed since considers Taiwan part of its territory
* Beijing aware of Itu Aba's value, would protect it if necessary - experts
The reason, say military strategists, is that Itu Aba could one day be in China's hands should it ever take over Taiwan, which it regards as a renegade province.
While Itu Aba, also called Tai Ping, is small, no other disputed island has such sophisticated facilities. Its runway is the biggest of only two in the Spratly archipelago that straddles the South China Sea, and the island has its own fresh water source.
"Taipei knows it is the only claimant that (China) will not bother, so it is free to upgrade its facilities on Tai Ping without fear of criticism from China," said Denny Roy, a senior fellow at the Hawaii-based East-West Center think tank.
"China would protect Taiwan's garrisons if necessary."
The upgraded facilities on Itu Aba should be finished late next year or earlier, officials from Taiwan's defence and transport ministries said, replacing an existing wharf that can only handle small vessels.
That would give Taiwan a port able to accommodate 3,000-tonne naval frigates and coastguard cutters while improvements are being made to the 1,200-metre (3,940-foot) long runway for its Hercules C-130 transport planes, they told Reuters.
Officials said the new port was not just a demonstration of sovereignty but also a way to support a trade dependent economy while helping Taiwanese deep-sea fishermen and marine and mineral research in the area. About $5 trillion in ship-borne goods pass through the South China Sea every year.
China and Taiwan share claims to virtually the entire South China Sea, a legacy of the Chinese civil war when the Communists split from the Nationalists and eventually took control of the Chinese mainland in 1949. The Nationalists settled on Taiwan, and still claim to be the legitimate rulers of greater China.
Vietnam, the Philippines, Malaysia and Brunei also claim parts of the potentially oil-rich South China Sea.
While China-Taiwan ties have warmed since Ma Ying-jeou was elected Taiwan president in 2008, there has been no political reconciliation or a lessening of military distrust. China has never ruled out force to bring Taiwan under its control.
But if conflict ever broke out in the Spratlys, analysts and military attaches believe China would seek to protect Itu Aba as its own, strongly aware of its strategic value.
The Spratlys are one of the main flashpoints in the South China Sea, where military fortifications belonging to all claimants but Brunei are dotted across some of the world's busiest shipping lanes.
China for example occupies eight shoals and reefs but its strategists have long bristled at Vietnam's two dozen holdings. Manila occupies eight reefs and islands and Malaysia seven. Incidents at sea in recent years, such as ships getting rammed or attempted blockades, have usually involved China against the Philippines or Vietnam.
Zhang Zhexin, a research fellow on Taiwan issues at the Shanghai Institute for International Studies, said Beijing would not have a problem with Taiwan developing Itu Aba.
"Taiwan itself is Chinese territory anyway," he said.
"How can we have a territorial dispute within our own country? Of course Taiwan is part of China, so that includes all parts of China, including Tai Ping Island."
FAR FROM TAIWAN
Chinese Nationalist forces took over Itu Aba in 1946 after Japan used it as a submarine base during World War Two. France had occupied the island before the war as part of its colonial rule over then-Indochina.
The island, administered by Taiwan's coastguard, is some 1,600 km (1,000 miles) southwest of Taiwan, out of range of its U.S.-made F-16 warplanes. It lies between the Philippines, Vietnam and Malaysia.
Taiwanese coastguard personnel and soldiers are routinely stationed on Itu Aba, served by regular military transport flights and protected by coastal defence weapons.
Unlike Beijing, Taipei is low-key about asserting its claims in the South China Sea and does not deploy naval or civilian fleets to the outer limits of the so-called nine-dash line that Beijing displays on its official maps and which reaches deep into maritime Southeast Asia.
Taiwan has not trumpeted its upgrade to Itu Aba.
"We would never invade islands occupied by other nations, but we will actively defend our claims," said a spokesman for Lin Yu-fang, a legislator from Ma's ruling Kuomintang Party and a key backer of the port project.
The facility would provide services to any Taiwanese ships in the region, said Chen I-piao, acting chief engineer at the Taiwan Area National Expressway Administration Bureau, the unit responsible for building the wharf.
"Previously our vessels in the area had to liaise with other ships if they needed assistance. After the port is finished they'll be able to directly call at port."
Diplomatically isolated, Taiwan found itself in the international spotlight earlier this month when mobs attacked mostly Taiwanese factories in Vietnam, enraged by China's deployment of a giant oil rig in waters further north that are claimed by Hanoi. Many of the rioters mistook Taiwanese companies to be owned by mainland Chinese.
Scores of Vietnamese and Chinese ships continue to square off around the rig, placed between the Paracel islands occupied by China and the Vietnamese coast.
CHINA THE FOCUS OF REGIONAL PROTESTS
While Vietnam and the Philippines have protested plans by Taiwan to upgrade the wharf, the construction is generating much less heat than Beijing's muscle-flexing in the South China Sea.
Days after China deployed the oil rig to the Paracel chain, the Philippines accused Beijing of reclaiming land on a disputed reef in the Spratlys to build what would be its first airstrip in the South China Sea.
China has rejected a Philippine protest over the work on Johnson South Reef, saying it had the right to develop its territory.
Experts say any airstrip there would unlikely be a strategic game-changer because of the difficulty in building a workable runway on an atoll, unlike an island like Itu Aba.
And as Itu Aba is the largest island in the Spratlys and the only one with natural water supplies, legal experts say this could help any future formal claim to a 200-nautical mile exclusive economic zone and any fish and oil within it.
Taiwan has not cooperated with China on the South China Sea despite the historical ties to each other's claims given the political mistrust between them, but also because of its need to maintain good relations with the United States, a vocal critic of Beijing's policies in the disputed waters.
For the most part, Taiwan has kept its head down, not wanting to upset China or claimants in Southeast Asia given its economic links to both.
At various times Taiwan has pushed to be involved in regional mechanisms to easing tensions but resistance from China means it plays no part in any efforts through the Association of South East Asian Nations (ASEAN).
"I think the major concern is U.S.-Taiwan relations. The U.S. government asked Taiwan not to move close to China on the South China Sea," said Song Yann-Huei, a South China Sea expert at Academia Sinica, a study centre sponsored by the Taiwanese government.