"A potential military confrontation with Taiwan, and the prospect of US military intervention, remain the PLA's most immediate military concerns," the report said, referring to China's military, the People's Liberation Army.
The Pentagon report echoes previous US assessments that China's top strategic priority is to prevent Taiwan's independence.
'Blind and deafen'
Focusing on China's space warfare programmes, the Pentagon assessment said China was developing "a multi-dimensional programme" to prevent the use of satellites by potential enemies during any future conflict.
"The PLA is also exploring satellite jammers, kinetic energy weapons, high-powered lasers, high-powered microwave weapons, particle beam weapons, and electromagnetic pulse weapons for counterspace application"
It pointed to Chinese military publications which "emphasise the necessity of 'destroying, damaging, and interfering with the enemy’s reconnaissance/observation and communications satellites', suggesting such systems, as well as navigation and early warning satellites, could be among initial targets of attack to blind and deafen the enemy".
"The PLA is also exploring satellite jammers, kinetic energy weapons, high-powered lasers, high-powered microwave weapons, particle beam weapons, and electromagnetic pulse weapons for counterspace application," it said.
Last year China tested an anti-satellite weapon, using a ground-based ballistic missile to destroy one of its own obsolete weather satellites.
The test – which was not confirmed by China until two weeks later - caused alarm in the US military which relies heavily on satellites to manage its global communications networks.
On Tuesday China announced a 17.6 per cent rise in military spending – the latest in a series of double-digit increases – taking China's official annual defence budget to about $58.76bn
The Pentagon in its latest report on Monday said it believed the true figure to be between $97bn and $139bn
According to the White House the US military budget for 2007 was $439.3bn, a 48 per cent increase over 2001 figures
The test was also criticised by the US for massively increasing the amount of orbiting space debris that could pose a danger to other satellites and spacecraft.
In their latest assessment the Pentagon's analysts said that China "views the development of space and counter-space capabilities as bolstering national prestige and, like nuclear weapons, demonstrating the attributes of a world power".
Last month the US shot down one of its own crippled spy satellites, saying the operation was necessary to prevent its toxic fuel from potentially harming humans.
China and Russia both raised objections to the operation, hinting that the US was using the excuse of the potentially toxic propellant as a cover for testing its own anti-satellite weapons.
The Pentagon report also pointed to China's growing interest in electronic warfare, highlighting what it said were "numerous" intrusions into computer networks around the world, including some owned by the US government.
Spending as a proportion of global total (2005 figures):
Source: Stockhom International Peace Research Inst. (www.sipri.org)
Under the heading "Cyber warfare Capabilities", the report said that intrusions apparently from China into global computer networks used "many of the skills and capabilities that would also be required for computer network attack".
The report's authors said that while it was unclear whether the intrusions were carried out or backed by the Chinese military, "developing capabilities for cyber warfare is consistent with authoritative PLA writings on this subject".
On the issue of Taiwan the report said China was continuing to focus the bulk of its military build-up along its side of the strait separating the island from the mainland.
It said that while the region remained stable, China was adding more than 100 missiles a year to the estimated 1,000 it has pointing at the island.
With hundreds of thousands of troops based in the area and hundreds of aircraft, the report said the balance of power was increasingly in mainland China's favour.
China has repeatedly threatened to invade self-governing Taiwan if the island, which Beijing regards as its own, makes moves to declare formal independence.
China has not yet commented on the latest US report, but the annual Pentagon assessment usually draws a sharp rebuttal from Beijing.
Full Pentagon report
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On Tuesday Chinese officials announced a 17.6 per cent increase in defence spending, saying the bulk of the increase would be used to boost salaries and to cover higher oil prices, with only a moderate increase in spending on armaments.
Speaking at a Pentagon news conference, David Sedney, the US deputy assistant secretary of defence for East Asia, predicted that China would protest again that the report was misleading.
But he reiterated US calls for greater transparency from China on its military expansion.
However, he said that for the first time US and Chinese officials would meet to discuss the assessment, adding that China's top military representative in Washington was being briefed on its findings.
Sedney said recent US-China defence talks had been "surprisingly successful", producing agreements to establish a military-to-military hotline and to hold talks on each country's reports on the other's military power.
"I think the biggest thing for people to be concerned about really is the fact that we don't have that kind of strategic understanding of the Chinese intentions," he said.
"That leads to uncertainty."