(Adds Azeri foreign minister, paragraphs 5-7)
BAKU, April 15 Ex-Soviet Azerbaijan, in an 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.
Baku balanced its increased military spending with sustained supported for a diplomatic solution to the conflict.
Azerbaijan's foreign minister Elmar Mammadyarov said on Tuesday that with the appointment of a new Armenian foreign minister, Eduard Nalbandyan, he would press for talks, but only on the basis that the dispute region remains part of Azerbaijan.
"We can discuss the issue of autonomy for Nagorno-Karabakh only within Azerbaijan" Mammadyarov said.
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 militarised ceasefire line that separates the two sides, the biggest loss of life in a single clash for several years. (Reporting by Lada Yevgrashina; Writing by Christian Lowe; Editing by Stephen Weeks)