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(Reuters) - Ex-Soviet Azerbaijan, in a tense armed standoff with neighbour Armenia, is to increase military spending by 53 percent this year, state media quoted President Ilham Aliyev as saying on Tuesday.

Azerbaijan fought a war in the 1990s with Armenia over the territory of Nagorno-Karabakh. The two countries have never signed a peace treaty and Azerbaijan has not ruled out using force to restore its control over Nagorno-Karabakh.

“In the past 4-5 years the military and defence budget of the country has risen from $150 million to $1.3 billion. However Azerbaijan’s state budget over this period has risen ten-fold,” the Azerbaijan newspaper quoted Aliyev as saying.

“I believe that in the context of an overall increase in government spending, defence spending should be increased from $1.3 billion to $2 billion in 2008. Azerbaijan has great military potential and must strengthen this,” he said.

Nagorno-Karabakh is internationally-recognised as part of Azerbaijan. Since the war it and surrounding districts have been controlled by ethnic Armenian separatists who receive assistance from Armenia.

The International Crisis Group, a Brussels-based think tank, said in a report last year the fragile truce could be under threat, in part because Azerbaijan is using cash from energy exports to beef up its military.

Azerbaijan reported gross domestic product growth in 2007 of 25 percent, driven by revenues from the export of oil and gas. BP is a major investor in Azerbaijan’s energy sector.

Up to 16 people were killed last month in fighting between Azeri troops and Armenian forces along the heavily-militarized ceasefire line that separates the two sides, the biggest loss of life in a single clash for several years.
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