Army Major General Lo Hsien-che was recruited by China while stationed in Thailand between 2002 and 2005 and was detained late last month, the ministry said in a statement.

At the time of his arrest, the 51-year-old was head of the army's telecommunications and electronic information department, according to the statement.

"We don't know for sure, but there's no reason to believe that he stopped spying for China after returning home from Thailand," a ministry official told AFP, on condition of anonymity.

"This is definitely the worst Chinese communist espionage case in the past half century."

It was not immediately clear how much harm Lo had caused Taiwan's military, but given the sensitive affairs he was in charge of, "it could be serious," the official added.

Local media said prosecutors had seized highly confidential documents while searching Lo's office.

Some reportedly detail the Po Sheng (Broad Victory) system, a sophisticated command, control and communications network that Taiwan is purchasing from US defence contractor Lockheed Martin at a cost of Tw$46 billion ($1.6 billion).

China is believed to be very interested in learning more about the project as it enables the Taiwanese military to get access to US intelligence systems, the China Times newspaper said.

Other documents include the army's procurement of 30 Boeing-made Apache AH-64D Longbow attack helicopters and the army's underground optical fibre network system, it said.

The defence ministry has set up an ad hoc group in an effort to limit the possible damage, according to Lieutenant General Wang Ming-wo, acting director of the ministry's Political Warfare Bureau.

"He has brought shame to the military. Servicemen are supposed to be loyal to their country," Wang said.

The arrest of Lo came amid fast-warming ties between Taipei and Beijing following the 2008 election of Ma Ying-jeou of the China-friendly Kuomintang as president.

"Although tensions across the Taiwan Strait have eased over the past more than two years, the Chinese communists have not stopped their infiltration into Taiwan," said Wang.

"Instead, they have been stepping up their intelligence gathering, what we call the 'smokeless war,' against us."

Taiwan and China have spied on each other ever since they split in 1949 at the end of a civil war. Beijing still regards the island as part of its territory awaiting reunification.

Legislator Tsai Huang-lang from the main opposition Democratic Progressive Party, known for its anti-China stance, described the event as "a big military setback for Taiwan".

"Defence minister Kao Hua-chu and the ministry's chief of staff Lin Chen-yi should immediately step down to assume full responsibility," he said.

Military analysts warned that the espionage case may further delay the proposed US sale of next generation F-16 fighter jets and submarines, weapons Taiwan says it badly needs to defend itself against its giant neighbour.

"The case may give the United States second thoughts while evaluating the arms deals," said Wung Ming-hsien, a strategy expert at Tamkang University near Taipei.

Taipei applied to the US government to buy 66 F-16s in early 2007, but observers say Washington has held up the deal for fear of angering Beijing.

Now, the US government may also fear that a deal could cause military secrets to fall into Chinese hands, according to Wung.

"We're in touch with Taiwanese authorities on the case," said Sheila Paskman, a spokeswoman for The American Institute in Taiwan, the US de facto embassy in Taipei.

The United States has remained a leading arms supplier to Taiwan despite its switching of diplomatic recognition from Taipei to Beijing since 1979 and is obliged by its own laws to supply arms to the island.

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