PHNOM PENH (Reuters) - China and Southeast Asia signed a deal on Monday to give birth to the biggest free trade zone on earth, encompassing more than 1.7 billion people struggling to attain prosperity after centuries mired in poverty.

"I would say that this is one of the most significant agreements to be signed this year anywhere in the world," Rodolfo Severino, secretary general of the Association of South East Asian Nations (ASEAN), said earlier.

Another landmark accord underscored China's foray to mend fences when it signed a deal with its southern neighbours to avoid conflict over the disputed Spratly Islands in the South China Sea over which Beijing has come to the brink of war with Vietnam and the Philippines several times in recent years.

The deals culminated a day of talks among the 10 ASEAN members as well as China, South Korea and Japan that was dominated by a declaration condemning militant violence as a threat not only to people but to prosperity.

Reeling from last month's bombing on the paradise Indonesian island of Bali, leaders of some of the world's most populous Muslim nations urged the international community not to issue warnings against travel to countries increasingly reliant on tourism or to blame specific religious groups.

DON'T PICK ON PEOPLE

"We deplore the tendency in some quarters to identify terrorism with particular religious or ethnic groups," an ASEAN statement said.

With participants agreeing that the war on terror had become an essential ingredient of prosperity, leaders turned their attention to ways to boost trade and foster economic integration. The China agreement fitted the bill.

"Facts have shown that economic growth in China has not come about at the expense of the development of others," Chinese Premier Zhu Rongji told the meeting, pre-empting a growing chorus of concern that the Chinese behemoth could swamp its neighbours.

Negotiations on the Southeast Asia-China free trade area with a potential combined market of 1.7 billion people will start next year. China and ASEAN have a combined gross domestic product of $1.5 trillion to $2.0 trillion.

The free trade area that will stretch from the frozen steppes of China's northern Mongolia region to the palm-fringed beaches of Indonesia will be the largest in the world.

However, stumbling blocks lie in its path, including fears among several Southeast Asian nations that their fading tiger economies risk being swallowed up by the dynamic China dragon.

Analysts said one aim of the agreement was to enable China to sideline once-mighty Japan, and position its rapidly growing industries not only to expand trade to the south but to increase overseas investment as China moves from exporter to importer and from cheap manufacturing source to higher-end buyer.

DEAL, BUT WHERE'S THE INTEGRATION?

The deal comes as current efforts to set up an ASEAN Free Trade Area (AFTA) have lost their way.

"It is critical for ASEAN to know its destination and which path will take it there at the crucial crossroads in its history," Severino told the leaders in a swansong speech.

"Regional economic integration seems to have become stuck in framework agreements, work programmes and master plans," he raged in a thinly veiled reference to the deal with China.

The reluctance of some countries to make changes had stalled integration of the entire group, he told leaders in the Cambodian capital, Phnom Penh. He did not identify the member states.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Under AFTA, six of the 10 ASEAN nations are due to cut tariffs next year to between zero and five percent on all but a few goods traded in the region. The four less developed members are to reduce tariffs over the next decade.

The summit aims to promote economic integration, tackle terror and paper over cracks that perennially open up among 10 states that range from impoverished Laos to oil-rich Brunei and giant Indonesia, the world's most populous Muslim nation.

But officials at the talks, in a plush hotel surrounded by tight security in streets where the Khmer Rouge launched their "Killing Fields" genocide three decades ago, said leaders evinced few signs of understanding each other's positions.

The issue of North Korea's nuclear weapons programme nudged its way onto the agenda when the prime ministers of China, Japan and South Korea urged the group to join tough talk to urge the unpredictable communist state to abandon its ambitions.

Rare unanimity was also achieved in the war on terror.

"We call on the international community to avoid indiscriminately advising their citizens to refrain from visiting ...in the absence of established evidence to substantiate rumours of possible terrorist attacks," ASEAN said in its declaration.

The United States is among the many countries that have urged citizens not to visit Indonesia. It has withdrawn families of embassy staff from the country, citing fears of more attacks.

A statement on tourism pledged cooperation among law enforcement agencies to protect visitors seeking sun and sand.