China has "the greatest potential to compete militarily" with the United States and poses a threat to its region from its builds up of a weapons arsenal and long-range aircraft, the Defense Department warned Tuesday.

In the executive summary of its annual report to Congress, Pentagon officials say China's military build up appears focused on preparing for contingencies in the Taiwan Straits, but that "military acquisitions suggest it is also generating capabilities that could apply to other regional contingencies, such as conflicts over resources or territory."

Pentagon spokesman Bryan Whitman said much of this year's report reflects the findings from last year in which Beijing was said to be moving ahead with an ambitious plan to modernize its military with an eye toward defeating any conflict with rival Taiwan.

China considers Taiwan part of its territory, and has threatened to invade if the island declares formal independence or resists Beijing's insistence on negotiating a reunification. The United States, which is Taiwan's main arms supplier, has cautioned both countries not to force a change in the status quo.

The report says that short-range ballistic missiles now facing Taiwan have grown from an estimated 650-730 last year to 710-790 this year. In addition, the report points to "greater discussion of missile and nuclear doctrinal developments," new transport and tanker aircraft bought from Russia as well as additional missile destroyers.

China has increased by about 25,000 the number of ground forces deployed to the three regions opposite Taiwan, and has upgraded the units with tanks, armored personnel carriers and artillery.

The report also repeats what Defense Secretary Donald Rumsfeld has said before: "China's leaders have yet to adequately explain the purposes or desired end states of their military expansion. The outside world has little knowledge of Chinese motivations and decision making."

Peter Rodman, assistant defense secretary for international security, said he has no estimates for China's budget for defense growth and investment. Some U.S. officials have estimated China's defense budget is two to three times the publicly acknowledged size -- which was about $35 billion for 2006, with a continuing trend of double digit increases each year.

China has "a strategy of patiently, systematically, prudently developing their power in a comprehensive way over the long term," Rodman said. The U.S. must continue to closely monitor what China is doing, because "if we're not paying attention, then the balance of forces can tilt," he said.

A spokesman for the Chinese embassy said he had not yet seen the report. Chinese officials have criticized similar past studies, saying China is not a threat and accusing the U.S. of manufacturing excuses to sell weapons to Taiwan.

Rodman told reporters in a phone interview that the U.S. "takes China at its word" when officials say they would not initiate a nuclear strike. But he said the U.S. is wary because other Chinese officials have made statements in the past that suggest a debate is occurring within China about that option.

"We're watching pretty carefully," he said.

FOX News' Bret Baier and Nick Simeone and The Associated Press contributed to this report.