* Snowden revelations hover over U.S.-China talks
* U.S. sees intellectual property theft as core cyber issue
* U.S. taking stronger legal steps against infringers
By Paul Eckert
WASHINGTON, July 8 (Reuters) - Revelations by former U.S. spy agency contractor Edward Snowden will make it harder for the United States to confront China at talks this week over the alleged cyber theft of trade secrets worth hundreds of billions of dollars a year.
Snowden's disclosures of American electronic surveillance around the world give China an argument to counter U.S. complaints that it steals private intellectual property (IP) from U.S. companies and research centers.
Cyber security is at the center of high-level talks between the two countries in Washington that will show whether a positive tone struck by President Barack Obama and new Chinese President Xi Jinping at a summit last month can translate into cooperation on difficult issues.
Top U.S. officials, from Obama down, have long tried to convince China to recognize a clear line between the kind of cyber espionage by spy agencies revealed by Snowden and the theft of technology.
"This Snowden thing has muddied the waters in a terrible way," said James McGregor, author of a book on China's authoritarian capitalism and industrial policy.
"China would rather have the waters muddy, because they can say 'You do it. We do it. What's the big deal?' and the cyber theft from companies will go on and on," he said by telephone from China, where he is senior counselor for APCO Worldwide, a U.S. business consultancy.
At the talks, U.S. officials will press China on cyber theft, Treasury Secretary Jack Lew said last week, describing the problem as "just different from other kinds of issues in the cyber area."
Many countries spy on each other, but U.S. officials say China is unique in the amount of state-sponsored IP theft it carries out as it tries to catch up with the United States in economic power and technological prowess.
Last week the U.S. Department of Justice charged Chinese wind turbine maker Sinovel Wind Group Co and two of its employees with stealing software source code from U.S.-based AMSC worth $800 million.
The U.S. Chamber of Commerce hopes "to see a clear indication that China recognizes thefts of trade secrets, whether by cyber or other means, is stealing property and will bring the full force of its laws to curb this," said Jeremie Waterman, the group's senior director for Greater China.
Beijing parries complaints about Chinese hacking into the computers of U.S. businesses by saying China is itself a major victim of cyber espionage. Chinese officials have dismissed as unconvincing recent U.S. official and private-sector reports attributing large-scale hacking of American networks to China.
China's official Xinhua news agency said last month the Snowden case showed the United States was "the biggest villain in our age" and a hypocrite for complaining about Chinese cyber attacks.
On Tuesday, the Communist Party's People's Daily attacked the United States for a hypocritical internet policy of defending hacking in the name of national security when it suited Washington's purposes.
"Differentiating hacking attacks as 'good' and 'bad' is a double standard when it comes to internet security," the newspaper's overseas edition said in a front page comment.
China's stance seems to be stiffened by Snowden's revelations of widespread surveillance by the National Security Agency and his assertion that the agency hacked into critical network infrastructure at universities in China and Hong Kong.
Snowden fled to Hong Kong before his leaks to newspapers became public last month, and then went to Moscow, where he is believed to be holed up in the transit area of the Sheremetyevo airport, trying to find a country to give him sanctuary.
'OUT OF BOUNDS' SPYING
Now in their fifth year, the annual U.S.-Chinese talks, known as the Strategic and Economic Dialogue, will cover topics from U.S. concerns about North Korea's nuclear weapons and expanding military ties to climate change and access to Chinese financial markets.
China's exchange-rate policy is on the agenda, although it has receded as an issue with the gradual strengthening of the yuan and a reduction of huge current account imbalances.
This year U.S. Secretary of State John Kerry and Lew host Chinese State Councilor Yang Jiechi and Vice Premier Wang Yang for the first such dialogue session since China's once-a-decade leadership change in March, when Xi took over.
The meetings follow Obama's summit last month with Xi in California, where the two men developed what aides called a productive relationship. Nevertheless, Obama demanded Chinese action to halt what he called "out of bounds" cyber spying.
Officials from the two countries discussed international law and practices in cyberspace at low-level talks on Monday. Cyber security will feature at other meetings during the week that are also likely to address U.S. accusations that Beijing gained access electronically to Pentagon weapons designs.
IP theft costs U.S. businesses $320 billion a year, a sum equivalent to annual U.S. exports to Asia, the authors of a recent report say.
China accounts for between 50 percent and 80 percent of IP theft suffered by U.S. firms, the Commission on the Theft of American Intellectual Property, a bipartisan group of former U.S. officials, said in a May report.
Cyber theft of industrial designs, business strategies and trade secrets is just a part of IP pilfering.
IP theft also involves "planted employees, bribed employees, employees who were appealed to on the basis of nationalism and all the traditional means of espionage, often accompanied by cyber," said Richard Ellings, president of the National Bureau of Asian Research think tank, who co-wrote the report.
The U.S. District Court in Manhattan charged three New York University researchers in May with conspiring to take bribes from Chinese medical and research outfits for details about NYU research into magnetic resonance imaging technology.
Arrests by U.S. Immigration and Customs Enforcement and the Homeland Security Department for IP infringements rose 159 percent and indictments increased 264 percent from 2009 to 2013,
a June report by the U.S. Intellectual Property Enforcement Coordinator showed.
The Commission on the Theft of American Intellectual Property called for tough penalties including banking sanctions, bans on imports and blacklisting in U.S. financial markets.