Chen made the announcement on an airplane while en route to Panama for an official visit, a presidential official told AFP.

The live-fire Han Kuang military drill had been cancelled "to show Taiwan's utmost goodwill," Chen told reporters onboard the plane, according to a local television broadcast Tuesday.

"I feel this is very important because we look forward to creating a win-win (situation) for both sides across the Taiwan Strait based on the principle of peace," Chen said.

Chen left for Panama late Monday night to attend the inauguration of his counterpart Martin Torrijos. He will also visit Belize during the trip and make brief stops in Honolulu and Seattle for refuelling.

The president had discussed the cancellation plan with Defense Minister Lee Jye before he left for Latin America, the presidential official added.

According to earlier reports, China has cancelled a military exercise on Dongshan Island near Taiwan, withdrawing some 3,000 troops in a move Taiwan's defense authorities described as "abnormal."

China has long considered Taiwan part of its territory to be reunified, by force if necessary. The two sides split in 1949 at the end of a civil war.

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