The second day of the "Bastion 2004" exercise went ahead as the London-based International Institute for Strategic Studies said Cuba has increased defence spending for the first time in many years in "a reflection of growing tensions between Washington and Havana."

Cuban regular troops are also taking part in the exercises, heavily covered by the communist nation's official media.

Trucks towing armored cars and officers armed for battle were mobilized on the streets of Havana. Massive underground shelters where planes, tanks and heavy artillery are housed were opened to combat troops.

"The enemy will never catch us by surprise," the communist party daily, Granma said.

"The only way to stop aggression is to make it abundantly clear that, in this case, Cuba will become from one end (of the island) to the other an enormous wasp's nest that no aggressor, however powerful, will be able to overcome," Defense Minister Raul Castro said Monday.

"In the end, (the aggressor) will have to withdraw, bloodied and defeated, because this would be a war of all of the people," Castro, a younger brother of President Fidel Castro, warned.

Raul Castro said last week the exercises were in part to make sure that Washington "does not commit the errors it committed in Vietnam and that it is now committing in Iraq. So that they do not underestimate our people, who are united and more powerful than those in Iraq."

The IISS said in its annual Military Balance 2004/2005 report that most of the Soviet-made weapons used by the Cuban armed forces are outdated and considered obsolete by most experts.

Cuba's army is estimated at 38,000 troops with about 900 tanks. There is also a small navy and air force.

According to Cuban officials, the military has divided the island of 11 million people into 1,400 "defense zones" intended to be able to operate independently in case of war.

Squadrons trained in guerrilla tactics have several special Cuban-made arms including "Alejandro" rifles that fire anti-tank grenades and "Mambi" rifles designed to puncture heavy armor, as well as mines and anti-tank units.

Each zone has an anti-air heat-guided missile launcher.

The United States on Monday rejected assertions that it planned an invasion. "We don't think there is any justification, or any particular foundation for this kind of charge," said US State Department spokesman Richard Boucher.

These exercises "are just, I would say, one or more of the many things that the Cuban government does to try to distract people from the problems that they face in their daily lives," Boucher said.

The communist-run island sits some 90 miles (145 kilometers) off the coast of Florida.

Despite the military exercises and rhetoric, a delegation of US lawmakers and businessmen was to start talks in Havana on Wednesday about selling about 100 million dollars of US food and agricultural products to Cuba.

The war games also went ahead as the ailing President Castro welcomed Venezuelan President Hugo Chavez, his only close ally in the Americas, whose government helps keep Cuba's economy afloat with cut-rate oil.

The two presidents were to have talks on Tuesday, with energy expected to be a key topic.

With its oil-burning plants, Cuba relies on imports from Venezuela, Latin America's only OPEC member, delivers 53,000 barrels of crude a day to Cuba. It is also a major supplier to the United States.

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