Taiwan has test-fired a cruise missile capable of hitting Shanghai or Hong Kong, a Taiwanese newspaper reports.
Pro-independence Annette Lu plans to run for the Taiwan presidency
The missile was secretly tested early last month, the United Daily News quoted a military source as saying.
The news comes days after China announced a major hike in military spending and the Taiwanese president gave a strong pro-independence speech.
Tensions will not be eased by news that Taiwan's strongly pro-independence vice president plans to run for president.
Annette Lu, who has been called a "lunatic" and the "scum of the nation" by China for her outspoken views, aims to become Taiwan's first female president in next year's election.
The United Daily News reported that a Hsiungfeng 2E missile was tested at the southern Chiupeng base on 2 February, attended by President Chen Shui-bian.
The missiles have a range of up to 1,000 km (620 miles), enough to hit China's two important financial centres, Shanghai and Hong Kong, the newspaper said.
Ruled by separate governments since end of Chinese civil war in 1949
China considers the island part of its territory
China has offered a "one country, two systems" solution, like Hong Kong
Most people in Taiwan support status quo
The Taiwanese defence ministry, which says China has hundreds of missiles pointed at the island, declined to comment on the report.
On Sunday, China announced its military budget for 2007 would increase by 17.8%, triggering concern from Taiwan and its closest ally, the US, in particular.
Earlier in the month, China demanded the US halt a planned sale of $421m (£216m) worth of missiles to Taiwan.
Beijing has also accused the US of acting like a nosy neighbour after US Vice-President Dick Cheney said China's military build-up was at odds with its stated goal of peaceful development.
China sees Taiwan as part of its territory has threatened to use force if the island ever moved to declare formal independence.
The United States is committed to supplying Taiwan with defensive weapons, and has said it would view any Chinese attack as a matter of "grave concern" to the US.
However, the US also opposes any attempts by Taiwan to push for independence from China, and rebuked President Chen Shui-bian for his comments on Sunday.
'Criminal in history'
In a speech to a pro-independence group, Mr Chen set out "four wants" for Taiwan - namely independence, a new constitution, further development and a change to the country's officially designated name from the "Republic of China" to Taiwan.
China's military build-up has drawn criticism from the US and Taiwan
President Chen has long sought to emphasise Taiwan's separate identity, but Sunday's comments were his strongest since taking office, a BBC correspondent says.
In response, China's Foreign Minister Li Zhaoxing said: "Whoever wants to split away will become a criminal in history".
The annual session of China's parliament, which opened on Monday, has also been hearing determined talk by the government to reunite Taiwan with the mainland.
Announcing her plans to run for president, Annette Lu said she would seek "constructive engagement" with China but reiterated her intention to push Taiwanese independence.
Ms Lu, 62, would be a controversial choice if given the nomination by the ruling Democratic Progressive Party to run in the presidential election.
A former political dissident - who once served a prison sentence for "violent sedition" - her outspoken pro-independence views have made her the woman Beijing loves to hate.
Vice-president since 2000, she was heavily criticised by China for her reported remarks that the people on either side of the Taiwan Strait were "distant relatives and close neighbours".