China has developed a sophisticated cyber warfare program and stepped up its capacity to penetrate US computer networks to extract sensitive information, a US congressional panel warned on Thursday.

"China has an active cyber espionage program," the US-China Economic and Security Review Commission said in its annual report to the US Congress. "China is targeting US government and commercial computers."

In its 393-page report, the panel also criticized Beijing for exercising "heavy-handed government control" over its economy and "continuing arms sales and military support to rogue regimes" such as Sudan, Myanmar and Iran.

The commission also issued a warning about China's space program. "China continues to make significant progress in developing space capabilities, many of which easily translate to enhanced military capacity," it said.

"Although some Chinese space programs have no explicit military intent, many space systems -- such as communications, navigation, meteorological, and imagery systems -- are dual use in nature," the commission said.

The commission, which was established by Congress in 2000 to analyze the economic and national security relationship between the two nations, said China was investing heavily in cyber warfare.

"Since China's current cyber operations capability is so advanced, it can engage in forms of cyber warfare so sophisticated that the United States may be unable to counteract or even detect the efforts," the commission said.

It said Chinese hacker groups may be operating with government support.

"By some estimates, there are 250 hacker groups in China that are tolerated and may even be encouraged by the government to enter and disrupt computer networks," the commission said.

It quoted Colonel Gary McAlum, chief of staff for the US Strategic Command's Joint Task Force for Global Network Operations, as saying China has recognized the importance of cyber operations as a tool of warfare and "has the intent and capability to conduct cyber operations anywhere in the world at any time."

"China is aggressively pursuing cyber warfare capabilities that may provide it with an asymmetric advantage against the United States," the commission said. "In a conflict situation, this advantage would reduce current US conventional military dominance."

The commission recalled that unclassified US military, government and government contractor websites and computer systems were the victims of cyber intrusions in 2002 codenamed "Titan Rain" and attributed to China.

And earlier this month The Financial Times, citing an unnamed senior US official, reported that Chinese hackers -- possibly with backing by the Beijing government -- had penetrated the White House computer network and obtained emails between government officials.

The commission made 45 recommendations to Congress including possible "additional funding for military, intelligence and homeland security programs that monitor and protect critical American computer networks."

On the economic front, the commission said "China relies on heavy-handed government control over its economy to maintain an export advantage over other countries."

"The result: China has amassed nearly two trillion dollars in foreign exchange and has increasingly used its hoard to manipulate currency trading and diplomatic relations with other nations," it said.

"Rather than use this money for the benefit of its citizens -- by funding pensions and erecting hospitals and schools, for example -- China has been using the funds to seek political and economic influence over other nations," said Larry Wortzel, chairman of the commission.

Beijing's "continuing arms sales and military support to rogue regimes, namely Sudan, Burma, and Iran, threaten the stability of fragile regions and hinder US and international efforts to address international crises, such as the genocide in Darfur," the commission added.

The commission acknowledged some progress by China, specifically its adherence to non-proliferation agreements and involvement in the six-party talks to dismantle North Korea's nuclear weapons production capacity.

But it criticized China's use of prison labor to produce goods for export and an "information control regime" that it said regulates the print and broadcast media, Internet, entertainment and education.

The report is available on the commission's website at www.uscc.gov.