The assessment, in the Taiwan defence ministry's biennial white paper, came hours before opposition lawmakers blocked an $18 billion special arms budget from being included on the legislative agenda for a sixth time.
"By 2006, the military advantage in the Taiwan Strait will tilt in favour of communist China," the defence ministry said on Tuesday.
"If the situation continues to deteriorate, there will be an imbalance of military power between the two sides, which will be extremely unfavourable for our national security."
Many security analysts see the Taiwan Strait as the most dangerous flashpoint in Asia.
China claims sovereignty over Taiwan and has threatened to attack the island of 25 million people if it formally declares independence.
Tension between the arch-foes has simmered since the re-election of Taiwan's president, Chen Shui-bian, in March.
Beijing, which sees Taiwan as a renegade province, believes Chen may declare formal independence before his second and last four-year term ends in 2008.
Beijing sees Taiwan as a
The defence ministry said an imbalance of power could tempt the mainland to use force.
"The imbalance of military power will be conducive for communist China to resolve the Taiwan issue through military means," it said.
Assessing scenarios, the ministry said in its 298-page report China's 2.23 million-strong army would most likely launch a surprise attack, such as invading offshore islands, firing missiles or imposing a sea blockade, and seek to paralyse government and military command.
Arms deal blocked
China has deployed 610 ballistic missiles and can mobilise 250,000 ground troops, 1000 fighter aircraft and 730 warships against the island, the Taiwan ministry said.
Although the military denied the report was an effort to drum up support for the T$610.8 billion ($18 billion) US arms deal, it made clear time was not on Taiwan's side.
The opposition has blocked the deal for six Patriot PAC-3 anti-missile batteries, eight diesel-electric submarines and 12 P-3C Orion submarine-hunting aircraft, saying they were overpriced.
The deal is expected to be stalled until a new parliament takes office in February.
Taiwan is concerned about
China's military might
But even then, its smooth passage is seen as unlikely since an opposition coalition beat the ruling party in legislative polls on Saturday and retained a slim majority.
The arms package was offered by US President George Bush three years ago. It would be the biggest arms deal for Taiwan in more than a decade.
The US, although committed by law to defend Taiwan, has increasingly made clear its support is not unlimited, especially if Taipei provokes war with Beijing.
The US acknowledges China's claim on Taiwan, but remains the island's biggest arms supplier.
"We can talk about peace only when we are able to fight," Hu Cheng-fu, a deputy defence minister, said.
"If we fail to pass the deal, the Americans will think we are not committed to defend ourselves," he said.
"Before the US loses its confidence in us, there is still room to negotiate the price. Once the US loses its confidence, we won't be able to buy those weapons even if we have the money."
The US supports China's claim to
Taiwan but also arms the island
Kenneth Lieberthal, once former president Bill Clinton's top Asia adviser, said on Monday he agreed with a Taiwan opposition complaint that the proposed mix of arms in the budget was not well-suited to Taiwan's needs.
But he has said Taipei must make prudent weapons purchases so China does not feel it can bully the island.