The military-controlled Chungshan Institute of Science and Technology plans to test-fire before year-end the weaponry refitted from the indigenous "Hsiung Feng" anti-ship missile, Taipei's Apple Daily said.

Mass production could begin in 2006, it said.

With a range of 900 missiles (540 miles), the missile could hit the Chinese cities of Shanghai and Nanjing.

If budget permits, Taiwan's military plans to produce six such cruise missiles each year at a cost of 100 million Taiwan dollars (2.94 million US) apiece, the daily said.

The defense ministry declined to comment on the report.

The institute twice unsuccessfully test-fired the system last year, the daily said.

"Chungshan's research team found the problem was with the turbofan engine," it said, adding the researchers had tackled the problem.

The institute kicked off the weaponry development programme in 2000, the daily said.

The report came a week after Premier Yu vowed to retaliate should China launch missile attacks against the island.

"You (China) have the capability to destroy me and Taiwan should have the capability to counter. You strike me with 100 missiles and I should at least strike back with 50," Yu told a gathering of government officials.

"You strike Taipei and Kaohsiung and I shall strike Shanghai. This way Taiwan will be safe," he said.

Yu's remarks angered Beijing, which called it a "belligerent provocation" and a "clamor for war".

Taiwan's Defense Minister Lee Jye Thursday told parliament China was likely to have 800 ballistic missles targeting the island before the end of 2006 and pressed the case for an 18 billion US dollar special defence budget.

Since pro-independence president Chen Shui-bian was re-elected in March, Beijing has stressed its long-standing vow to take Taiwan by force should it declare formal independence.

Taiwan and China split in 1949 at the end of a civil war.

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