by Tyra Dempster and Mark Chisholm

URUMQI, China - At least 140 people have been killed in rioting in China's northwestern region of Xinjiang, with the government blaming exiled separatists for the Muslim area's worst case of unrest in years.

Hundreds of rioters have been arrested, the official Xinhua news agency reported, after rock-throwing Uighur people took to the streets of the regional capital on Sunday, some burning and smashing vehicles and confronting ranks of anti-riot police.

The unrest underscores 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 cases the government has sought to maintain its grip by controlling religious and cultural life while also vowing economic growth and prosperity.

But analysts said the fresh trouble in the remote resource-rich region was unlikely to have a major impact on China's economy.

"In terms of China's domestic economy, it is in a remote place and it does not have a big impact on things generally unless there is some evidence, of which there is none, that the government is in some meaningful way losing control," said Arthur Kroeber, Managing Director of Dragonomics, a research and advisory firm in Beijing.

Beijing's image as a global power, though, may take a hit as it cracks down on the rioters, say analysts.

"Unfortunately ... this will bring a negative impact on China's image as a responsible power. Coercion alone will not solve the problem. If you use coercion alone it will worsen the problem," said Zheng Yongnian, director of the East Asian Institute at the National University of Singapore.

Signaling a security crackdown in the strategic region near Pakistan and central Asia, a 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 adamantly 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 dominance of economic opportunities.

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.

HAN CHINESE TARGETED

Li Zhi, the Communist Party boss of regional capital Urumqi told a news conference that the death toll from the rioting had risen to 140, the semi-official China News Agency said. Xinhua said 816 people were hurt and admitted to hospital.

Xinhua did not give the ethnic identity of the dead, or say if they were civilians or police, but admissions at the People's Hospitals, one of the biggest in Urumqi, 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.

The riot in Urumqi, 3,270 km (2,050 miles) west of Beijing, followed a protest against the government's handling of a June clash between Han Chinese and Uighur factory workers in southern China, where two Uighurs died in Shaoguan.

"In Xinjiang one of the major sources of discontent is that there is still a major gap economically between Han and Uighurs," said Barry Sautman, a specialist on China's ethnic politics at the Hong Kong University of Science and Technology.

Almost half of Xinjiang's 20 million people are Uighurs. The population of Urumqi is mostly Han Chinese, and the Uighurs complain they dominate economic opportunities.

Chinese state television showed rioters throwing rocks at police and overturning a police car, and smoke billowing from burning vehicles.

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

Police 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 and Ben Blanchard in Shanghai; Editing by Sanjeev Miglani and Jeremy Laurence)