US and Filipino Marines armed with assault rifles and smoke grenades stormed a South China Sea island Wednesday in war games south of a real-life standoff between Manila and Beijing.

The mock beach-front assault took place on the shore of Palawan island in the South China Sea, where for two weeks Chinese patrol vessels have prevented the Philippines from arresting alleged poachers in the disputed waters.

Manila insisted the exercise was not directed at China, but Beijing warned the United States against actions that might upset regional stability -- and refused to rule out military action to resolve the high-seas impasse.

Any military action "will be based on the needs of diplomacy", China's defence minister, General Liang Guanglie, said on Hong Kong's Phoenix Television.

But Liang also said he believed China and the the Philippines would be able to peacefully resolve the escalating row over Scarborough Shoal -- known in Chinese as Huangyan Island -- in the South China Sea.

The minister added: "We hope the things the United States is doing in the Asia-Pacific region will be beneficial to prosperity, stability and development in the Asia-Pacific region."

China claims all of the South China Sea as a historic part of its territory, even waters close to the coasts of the Philippines and other Southeast Asian countries.

Competing claims to the strategically vital and potentially oil-rich waters have long made the area one of Asia's potential flashpoints for military conflict.

Lieutenant-Colonel Rommel Abrau, operations officer of the Philippine Marines' amphibious task force, said the war games 575 kilometres (360 miles) south of Scarborough Shoal posed no threat to China.

"Definitely, there is no political colour here. This has long been planned and it is not directed against anyone, or any country. This is purely a training exercise meant to improve our joint capabilities," he told AFP.

The exercise involving about 100 US and Filipino Marines simulated an assault on an island that had been taken over "by an armed terrorist group", Abrau said.

The joint US-Filipino force "retook the base, freed the hostages and neutralised the enemy", he said.

The mid-morning exercise began with Filipino Marine scouts swimming into the U-shaped bay and engaging enemy guards in close-quarter combat.

Amid the explosions of red and white smoke grenades, the rest of the troops swept into the beach from the sea using inflatable boats launched from a bigger Filipino Marine vessel anchored off the bay.

Using long firearms and assault rifles armed with blanks, a quick firefight ensued before the invading force overpowered the defenders and rescued several "hostages".

"It was one of the best simulated trainings I've ever had as a Marine," said US Sergeant Matthew Milanuk, a 25-year-old Nebraska native who has seen action in Iraq.

"I think the Filipino Marines are a capable force and can handle their own if this were a real situation," he said, but declined to comment on the political implications of the war games.

The beach assault came days after commando teams roped down from US helicopters onto waiting rubber boats to "retake" an offshore oil rig also supposedly taken over by an enemy force.

Philippine firm Forum Energy said Tuesday it intended to pursue natural-gas exploration in the South China Sea amid expectations its Reed Bank project, also claimed by China, contains the Philippines' largest gas deposit.

The Philippines and United States are bound by a 1951 treaty that calls on both sides to come to each other's aid in times of external aggression or war.

Lieutenant-Colonel Duane Thiessen, the commander of US Marines in the Pacific based in Okinawa, Japan, said on Sunday that Washington took the treaty very seriously.

The United States has more broadly been shifting military resources to Asia, with a Marines contingent now deployed to Darwin in northern Australia, much to China's suspicion.