At least 156 people have been killed in rioting in China's northwestern Xinjiang region, with the government blaming exiled separatists for the traditionally Muslim area's worst case of unrest in years.

Hundreds of people have been arrested, the official Xinhua news agency said, after protesters from the Uighur minority took to the streets of the regional capital Urumqi on Sunday, burning and smashing vehicles and shops, and clashing with police.

Police dispersed about 200 people trying to gather at the Id Kah mosque in the center of the Silk Road city of Kashgar on Monday evening, Xinhua said.

The unrest highlights the volatile ethnic tensions that have accompanied China's growing economic and political stake in its western frontiers.

Along with Tibet, Xinjiang is one of the most politically sensitive regions in China and in both places the government has sought to maintain its grip by controlling religious and cultural life while promising economic growth and prosperity.

But minorities have long complained that Han Chinese have reaped most of the benefits from official subsidies, while making locals feel like outsiders in their own homes.

No figures have been given on the ethnic identity of the dead but a senior security official said that many of the bodies he saw were Han Chinese, suggesting an explosion of pent-up anger against the economically dominant group.

It was like a war zone here, with many bodies of ethnic Han people lying on the road, Xinhua quoted Huang Yabo, deputy director of the Urumqi Public Security Bureau saying.

By late Monday order was restored in Urumqi. Anti-riot police patrolled clean, quiet streets, a reminder of the strength of the Chinese state in an area which has long had a heavy security presence.

But in a sign unrest might be spreading, Xinhua said that along with the protest in Kashgar, police also had clues about efforts to organize unrest in Aksu city and Yili prefecture, the latter a border region hit by ethnic unrest in the late 1990s.

If the violence triggers scrutiny of Beijing's policies in Xinjiang or if officials launch a harsh crackdown, China's standing as a global power may take a hit, analysts say.

This will bring a negative impact on China's image as a responsible power. Coercion alone will not solve the problem, said Zheng Yongnian, director of the East Asian Institute at the National University of Singapore.

The United States urged all in Xinjiang to exercise restraint.

We are deeply concerned over reports of many deaths and injuries from violence in Urumqi in western China, said White House spokesman Robert Gibbs. Reports so far are unclear about the circumstance surrounding the deaths and injuries, so it would be premature to comment or speculate further.

China's markets largely brushed off the riots, with the benchmark Shanghai Composite index ending up 1.2 percent at a 13-month closing high, bucking a generally weaker trend in the rest of Asia.

This is regional unrest only, said Zheshang Securities analyst Zhang Yanbing.

OVERSEAS FORCES BLAMED

The death toll from the riot in Urumqi, 3,270 km (2,050 miles) west of Beijing, could rise further. Over 800 people were injured, Xinhua quoted Xinjiang police chief Liu Yaohua saying.

Signaling a crackdown in the strategic region near Pakistan and central Asia, another senior Chinese government official said the unrest was the work of extremist forces abroad.

This was a crime of violence that was pre-meditated and organized, Xinhua quoted the unnamed official as saying.

He blamed the violence on the World Uyghur Congress led by Rebiya Kadeer, a Uighur businesswoman now in exile in the United States after years in jail, and accused of separatist activities. She did not answer calls for comment.

But exiled Uighur groups rejected the Chinese government claim of a plot. They said the riot was an outpouring of pent-up anger over government policies and Han Chinese economic dominance.

The riot followed a protest about government handling of a June clash between Han Chinese and Uighurs in Southern China, where two Uighurs died, after a false allegation that six Uighurs had gang-raped a Han Chinese woman.

Almost half of Xinjiang's 20 million people are Uighurs, but the population of Urumqi is mostly Han Chinese.

These incidents reflect the complete failure of government policies in ethnic minority areas, although there is no justification for the violence, said Nicholas Bequelin at Human Rights Watch in Hong Kong.

People who go out to demonstrate on the streets of Urumqi know that the retribution will be terrible. For people to go out and do that when they know the consequences is a sign that they are desperate to find an outlet for their grievances.

Chinese state television showed injured and bloody civilians, who mostly appeared to be Han Chinese, rioters throwing rocks at police and overturning a police car and images of the charred shell of a bus.

I personally saw several Han people being stabbed. Many people on buses were scared witless, Zhang Wanxin, a Urumqi resident, said by telephone.

Admissions at the People's Hospitals, one of the biggest in Urumqi, also suggested Han Chinese were targeted.

Xinhua said the hospital received 291 people of whom 17 died later. Among them 233 were Han Chinese, 39 were Uighurs, while the rest were from other ethnic minorities.

Police have rounded up several hundred who participated in the violence, including more than 10 key players who fanned unrest, Xinhua said, and are searching for 90 others.

Residents in Urumqi were unable to access the Internet on Monday, several said. The city is basically under martial law, Yang Jin, a dried fruit merchant, said by telephone.

(Additional reporting by Chris Buckley, Emma Graham-Harrison, Yu Le and Benjamin Kang Lim in Beijing; Ben Blanchard in Shanghai and Arshad Mohammed in Washington; Editing by Myra MacDonald)

Pakistan China