*

Mulino said sovereignty over the canal is not up for

discussion

*

China's influence violates neutrality treaty, Rubio said

*

China's businesses in Panama under audit, silk road

agreement

will not be renewed

(Recasts throughout, adds comments by President Mulino)

By Simon Lewis and Elida Moreno

PANAMA CITY, Feb 2 (Reuters) - U.S. top diplomat Marco

Rubio warned Panama to immediately take steps to address U.S.

concerns over Chinese businesses operating ports near the canal,

which President Donald Trump has said represent a threat to U.S.

national security.

The U.S. and Panama made progress on key migration and

business issues during Rubio's visit in Panama City, but failed

to find common ground over the Panama Canal's operations, with

President Jose Mulino saying his country's sovereignty over the

world's second busiest waterway is not up for discussion.

"Trump has made a preliminary determination that the

current position of influence and control of the Chinese

Communist Party over the Panama Canal area is a threat to the

canal," said U.S. State Department spokesperson Tammy Bruce.

Trump has refused to rule out use of military force over

Panama, drawing criticism from Washington's Latin American

friends and foes alike. In a senate hearing last week, U.S.

officials said fines and restrictions on Panamanian-flag vessels

entering U.S. ports could be imposed due to the dispute over the

canal.

Following his meeting with Rubio, which he said was

respectful and cordial, Mulino announced that a memorandum of

understanding signed in July with the U.S. Department of

Homeland security could be expanded so Venezuelans, Colombians

and Ecuadoreans can be returned from the perilous Darien Gap at

U.S. cost, through an airstrip in Panama.

Mulino also showed willingness to review some Chinese

businesses in Panama, including a key 25-year concession to Hong

Kong-based CK Hutchison Holdings ( CKHUF ), renewed in 2021 for

the operation of ports at both entrances of the canal, pending

the results of an audit.

The contract has been targeted by U.S. lawmakers and the

government as an example of China's expansion in Panama, which

they claim goes against a neutrality treaty signed by both

countries in 1977.

Panama's government and some experts reject that assertion,

mainly because the ports are not part of the canal's operations

and have not represented a security issue.

A broad agreement between Panama and China to contribute to

China's silk road program, under which the Asian country

expanded investment in Panama during previous administrations,

will not be renewed, Mulino said.

"We'll study the possibility of terminating it early," he

added.

Mulino also said it will be "important" to have face-to-face

talks with Trump over key issues.

FIRST TOUR

The U.S. secretary of state is touring Central America and

the Caribbean on his first foray in the post as he seeks to

refocus U.S. diplomacy on the Western Hemisphere - in part to

recruit help in stemming migration toward the U.S. southern

border.

The visit also reflects a U.S. desire to counter China's

growing economic and political influence in Latin America.

Trump upon returning to office threatened to take control of

Panama Canal, built by the United States in the early 20th

century and handed over to Panama in 1999, claiming the canal is

being operated by China.

China has said it plays no part in operating the canal and

that it respects Panama's sovereignty and independence over the

waterway.

The canal is operated by the Panama Canal Authority, an

autonomous agency overseen by the Panamanian government.

Rubio, a longtime China hawk during his Senate career, said

last week that China could use the ports to shut down the canal,

a vital route for U.S. shipping, in the event of a conflict

between Beijing and Washington.

Rubio has ordered the State Department to put migration

issues at the center of its diplomacy with countries in the

region. Officials have said Rubio will use the trip to smooth

the acceptance of U.S. deportation flights to the region.