Azerbaijan will spend 300 million dollars (248 million euros) on its armed forces in 2005, a 70 percent increase over last year, the Azeri leader said at a ceremony in a military academy.

"The adversary must know that the Azerbaijani army can mobilize at any moment and liberate the occupied territories," Aliyev said. "Spending on the country's defense force will grow continuously."

In May, Azerbaijan inaugurated a US-backed pipeline, which will deliver oil from Caspian Sea oil fields to the Mediterranean and is expected to generate as much as 160 billion dollars for the country over the next 30 years.

Analysts say Baku may try to use the money to finance an attempt to restore control over Nagorno Karabakh.

Armenian forces took control of the mountainous area and seven other regions in a bitter war in the early 1990s, but Azerbaijan has refused to give up its claim to the territory.