* China plan could undermine confidence in East Asia - ASEAN
* China says pays great attention to freedom of navigation
* South China Sea is Asia's biggest potential military trouble spot
* Competing claims make South China Sea difficult issue for ASEAN
Southeast Asia's top diplomat warned on Friday of great anxiety over China's plan to board and search ships that illegally enter what it considers its territory in the disputed South China Sea and said it could lead to naval clashes and undermine confidence in East Asia's economy.
Beijing, however, moved to ease international alarm over the issue and said it attaches "great importance" to freedom of navigation in the South China Sea, a day after state media said police in its southern island province of Hainan will carry out the new plan.
"All countries have freedom of navigation in the South China Sea in accordance with international law," Foreign Ministry spokesman Hong Lei told a daily news briefing.
New rules to come into effect on Jan. 1 will allow police in the southern Chinese province of Hainan to board and seize control of foreign ships which "illegally enter" Chinese waters, the official China Daily reported on Thursday.
The report, which was also carried by other state media, further ratchets up tensions over Southeast Asia's biggest potential military flashpoint, one of the world's busiest shipping lanes where several countries claim sovereignty. The United States, which has been refocusing its military attention on Asia, says it has a national interest in freedom of navigation in the area.
A summit of Asian nations this month was overshadowed by disagreements between China and U.S. ally the Philippines over the dispute, and tensions were fanned again by China's move to issue new passports containing a map of its maritime claims.
Surin Pitsuwan, secretary-general of the Association of Southeast Asian Nations (ASEAN), told Reuters in a telephone interview that the Chinese plan was an escalation of tensions and a "very serious turn of events."
"It certainly has increased a level of concern and a level of great anxiety among all parties, particularly parties that would need the access, the passage and the freedom to go through," said Surin, who spoke from Thailand.
Surin, using unusually strong language, said the plan could lead to a major incident that would affect confidence in East Asia, a major engine of global economic growth.
Hong, the Chinese spokesman, declined to elaborate on the new rules and what might constitute illegal entry.
"All countries have freedom of navigation in the South China Sea in accordance with international law," he said.
China claims virtually the entire South China Sea. ASEAN members the Philippines, Vietnam, Brunei and Malaysia claim various parts, and so does Taiwan.
The territorial wrangle is a particular challenge to Southeast Asia, exposing how deeply its nations have been polarised by China's rapidly expanding economic and political influence in the region.
Tensions over the sea have simmered for decades but now it is difficult for ASEAN members to unite because they have competing claims, said Richard Bitzinger, senior fellow at the S. Rajaratnam School of International Studies in Singapore.
"The Chinese have painted themselves into a corner with the South China Sea issue by raising it to a fundamental issue of national sovereignty on par with Tibet or Taiwan that makes compromise difficult," Bitzinger said.
FREEDOM OF NAVIGATION
President Benigno Aquino of the Philippines said he had asked the country's foreign minister to verify the reported plan and that, if confirmed, Manila would lodge a diplomatic note or formal protest.
China's move would be difficult to implement because it runs counter to the United Nations Convention on the Law of the Sea, Aquino said. He also said China had made repeated statements that it would not block freedom of navigation in the area.
"We might accelerate and bring it before the appropriate international tribunal to finally settle the matter or at least start the process of settling it legally and concretely," he told reporters on the central Philippine island of Cebu.
Thailand coordinates between ASEAN and China and wants an atmosphere conducive to discussion and co-operation, said Arthayudh Srisamoot, director-general of the Department of ASEAN Affairs at the Ministry of Foreign Affairs in Bangkok.
"It does not want the current situation to deteriorate and wants to see both sides continue with talks. Thailand will not do anything to worsen the situation," Srisamoot said.
Analysts said the plan to board ships would be difficult to implement under international law and could backfire economically for China.
"Chinese provocation by boarding foreign vessels would roil global financial markets, add to global economic uncertainty, and impact global trade that would impact China as well," said Scott Harrison, managing director of Pacific Strategies and Assessments in Manila.