Taiwan is recognised by just 24, mostly small, impoverished countries, compared to 170 which recognise U.N. Security Council member China which seeks to isolate the island diplomatically.

China has claimed sovereignty over self-ruled Taiwan since the end of the Chinese civil war in 1949 and has vowed to bring the island back under mainland rule, by force if necessary.

The two sides use what has been called "chequebook diplomacy" to compete for allies among poor countries.

News reports in Malawi said China made the $6 billion aid offer, equivalent to almost three quarters of Malawi's 2006 GDP, in December, Taiwan Foreign Ministry spokeswoman Phoebe Yeh said.

"We'll do our best to increase development aid," Yeh said. "But we cannot compete with China like that."

The Malawi flap is Taiwan's worst diplomatic crisis since the island broke ties with long-time ally Costa Rica in June.

On Friday, Malawian leaders suddenly told the Taiwan foreign minister to cancel a scheduled visit. A Malawian foreign ministry official said later that the country would give diplomatic recognition to China but retain economic links with Taiwan.

The Malawi ambassador to Taiwan was unavailable for comment.

But Taiwan had averted another potential showdown, Yeh said, as newly elected Marshall Islands President Litowka Tomeing has indicated he would stick by Taiwan rather than push for ties with China as suggested by media reports last year.

"He has said multiple times that he would stick by Taiwan," Yeh said of the South Pacific nation's president-elect. "Speculation about a switch is untrue."

The spokesman for Tomeing's party told Reuters in November that the president-to-be backed Taiwan.