BEIJING, Sept 22 (Reuters) - China stepped up its condemnation of the United States on Thursday for selling arms to Taiwan saying they could disrupt military exchanges, a warning that is likely to unsettle, but not derail, ties with Washington.

China's Foreign Ministry has already lambasted the Obama administration for telling U.S. Congress on Wednesday that it plans a $5.3 billion upgrade of Taiwan's F-16 fighter fleet, and Beijing warned that the step would damage Sino-American military and security links.

China considers Taiwan a breakaway province to be reunified with the mainland eventually, and by force if necessary.

"The Chinese military expresses its utmost indignation and strong condemnation of this action that gravely interferes in China's domestic affairs and damages China's sovereignty and national security interests," a Ministry of Defence spokesman, Senior Colonel Geng Yansheng, said on the ministry's website (www.mod.gov.cn).

The U.S. offer of weapons sales to Taiwan would "create serious obstacles to the development of ordinary exchanges between our two militaries", said Geng.

China opposes U.S. arms sales to Taiwan on the grounds they sabotage Beijing's plans for reunification. Washington says it wants Beijing and Taipei to determine their future peacefully, and that it is obliged by U.S. law to help the island defend itself.

Chinese authorities were probably still weighing just how to punish the United States for the arms sales and would be closely watching domestic opinion, said Sun Zhe, a professor at Tsinghua University in Beijing who specialises in U.S. policy.

"This could be a spiralling response that can be adjusted up or down," Sun said.

"When it comes to arms sales to Taiwan, the (Chinese) public is strongly against and the central government will have to take into account public opinion or risk being criticised as too weak."

But despite Beijing's anger, tensions appear unlikely to match last year's, when Chinese outrage over an earlier U.S. arms offer to Taiwan added to several disputes that roiled relations with Washington for many months.

This year both sides have sought to keep relations on a steadier path ahead of 2012, when U.S. President Barack Obama faces re-election and China's Communist Party undergoes a leadership handover.

Obama and Chinese President Hu Jintao will have chances to meet in coming months at regional summits and the G20 meeting in France, which is likely to discourage lingering tension.

PLANES, CHICKENS AND MONEY

The arms sales announcement will nonetheless add to other recent irritants in the vast Sino-American relationship.

These include Washington's decision to challenge Chinese duties on U.S. poultry products and accelerating momentum in U.S. Congress to pass legislation pressing China to loosen controls on its yuan currency.

"China sees this as a political insult, because the United States says our two sides are in the same boat and it hopes that China will buy its Treasury bonds -- but then politically the United States does this," said Sun, the Tsinghua professor, speaking of the arms sale.

The People's Daily, the main paper of China's ruling Communist Party, warned the United States that it has a big economic stake in ties with China.

"American politicians are totally mistaken if they believe they can, on the one hand, demand that China behave as a responsible great power and cooperate with the United States on this and that issue, while on the other hand irresponsibly and wantonly harm China's core interests," said the paper in a commentary about the Taiwan arms sales.

The U.S. upgrade of Taiwan's 145 F-16s will give them much the same capabilities as late-model F-16 C/Ds that Taiwan has sought for years without success, Washington officials said.

The United States was likely to approve selling those newer F-16 fighters later, said I-Hsin Chen, a professor of American studies at Taiwan's Tamkang University, noting the risks to pilots flying aging planes and China's growing air strength.

"If other nations in this region think that the U.S. is not fully fulfilling its security commitment to Taiwan, they would also be afraid that some day they would be abandoned," he said.