BEIJING, Dec 3 (Reuters) - A Chinese-invested hydropower project in neighbouring Myanmar has deepened links between China and Myanmar's ruling generals and is destroying local livelihoods and the environment, according to a report released on Monday.

The Shweli dam is China's first build-operate-transfer hydropower project with Myanmar's military government, which recently crushed the biggest pro-democracy protests in nearly 20 years.

Under the agreement with Myanmar's Electric Power Ministry, China's Yunnan Joint Power Development Co are to operate the power station for 40 years.

Chinese companies would also receive 80 percent of the revenue generated, said the report by two Thailand-based groups, Salween Watch, a coalition concerned with Myanmar issues, and the Palaung Women's Organisation, dedicated to preserving the culture of the ethnic-minority Palaung people.

"Instead of fostering meaningful development with the participation of affected people, the junta is implementing development projects that merely benefit its own interests at the expense of its citizens," the report said.

Shweli 1, being built in the ethnic Palaung village of Man Tat near the Chinese border, is the first of a string of hydro projects under construction largely for the export of power to China.

The report cited documents from the Electric Power Ministry showing that electricity from the project would also be transmitted to military factories and mining operations within Myanmar.

The Yunnan Joint Power Development Co could not be reached for comment.

China, one of Myanmar's few allies and major trading partners, has been under pressure to use its influence to convince the junta to negotiate with pro-democracy activists.

Beijing has called for restraint, but opposes U.N. sanctions against Myanmar and is loath to compromise its interests there, which aside from power generation include timber and natural gas.

The Shweli 1 project, which has an installed capacity of 600 megawatts and is to begin operation at the end of 2008, had heightened the military presence in the region and altered the village economy, the report said.

A 300-strong light infantry battalion moved into the area in 2002 to set up a base and begin work on the project, seizing local land to do so. Villagers were forced to work on road construction, and an influx of Chinese workers had driven up prices.

"I cannot carry on farming because they built a road over the irrigation canal near my farm," the report quoted one villager as saying.

The report called for a halt to plans to build the Shweli 2 and 3 dam projects slated for downstream communities. It also urged China to follow its own laws on environmental assessment, public participation and proper compensation when doing business in Myanmar. (Reporting by Lindsay Beck; editing by Roger crabb)

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