ASEAN Way founders in South China Sea storm By Manuel Mogato and Stuart Grudgings MANILA/KUALA LUMPUR (Reuters) - As Philippine Foreign Minister Albert del Rosario began to raise the sensitive issue of the South China Sea at one of last week's Asian summit meetings, his microphone went dead. A technical glitch, said the Cambodian hosts. Perhaps something more sinister, hinted some diplomats who were frustrated by Chinese ally Cambodia's dogged efforts to keep the subject off the agenda. That account and others, described to Reuters by diplomats with direct knowledge of the talks and who asked not to be identified, reveals how deeply Southeast Asian nations have been polarized by China's rapidly expanding influence in the region. The fast-growing 10-nation Association of Southeast Asian Nations (ASEAN), which aims to form an EU-style economic bloc by 2015, insists it remains united despite its failure for the first time in 45 years to agree a concluding summit statement. But Reuters' interviews reveal deep discord and frayed tempers at last week's summit that are sharply at odds with the group's self-styled reputation for harmony and polite debate. "It was one of the most heated meetings in the history of ASEAN," one diplomat said. Another described Cambodia, which holds the revolving ASEAN chairmanship this year, as "the worst chair," and said China had effectively bought its loyalty and that of some other states with economic largesse. The breakdown has left attempts to craft a maritime "code of conduct" this year between ASEAN and China in tatters, raising the risk that growing incidents of naval brinkmanship over the oil-rich waters will spill over into conflict. It also underlines the huge challenge facing the United States as it refocuses its military and economic attention on Asia in response to China's rise. The South China Sea has become Asia's biggest potential military flashpoint as Beijing's sovereignty claims set it against Vietnam and the Philippines racing to tap possibly huge oil reserves. The failure touched on a long-standing ASEAN fear, says Carlyle Thayer, an emeritus professor at the University of New South Wales at the Australian Defense Force Academy -- that lack of unity would allow foreign powers to exploit its differences. "This is the first major breach of the dyke of regional autonomy," he said. China has now reached into ASEAN's inner sanctum and played on intra-ASEAN divisions. Cambodian Prime Minister Hun Sen has angrily rejected suggestions that China has "bought" Cambodia's support over the South China Sea dispute. China's foreign direct investment in Cambodia was $1.2 billion in 2011, almost 10 times that of the United States, according to an estimate by the government's Council for the Development of Cambodia. Chinese investment and trade has also surged in neighboring Myanmar and Laos. Cambodia batted away repeated attempts to raise the issue about the disputed waters during the ASEAN meeting last week as well as the ASEAN Regional Forum, which includes Japan and the United States, according to diplomats present. ASEAN Secretary-General Surin Pitsuwan was cut off in mid-address by Cambodia's foreign minister as he tried to bring up the topic, said several Southeast Asia diplomats. Del Rosario's microphone malfunction occurred at a Thursday morning ministerial meeting, diplomats said, as he raised the issue despite Cambodia's insistence that it should not be discussed. A Cambodian foreign ministry spokesman said it was "craziness" to suggest that it was switched off deliberately. On Friday, the last day of the summit, diplomats scrambled to avoid humiliation and agree an 11th-hour text for a joint statement. Regional giant Indonesia took the lead. Foreign Minister Marty Natalegawa even called his Singapore counterpart back from the airport to help draft a deal, the first ASEAN diplomat said. Natalegawa drafted 18 different versions of the statement in a desperate effort to appease both Cambodia and claimant states the Philippines and Vietnam, the diplomat said. Natalegawa's staff scurried long distances through Phnom Penh's cavernous Peace Palace to get the latest drafts to printer machines. But the attempts finally stalled over Cambodia's unwillingness to accept any mention of the Scarborough Shoal - the site of a recent naval stand-off between China and the Philippines - even after Manila accepted an Indonesian suggestion to change the wording to "affected shoal." "The host should have played a bigger role, but he didn't," the ASEAN diplomat said. Then came the fallout. The Philippines said it deplored the outcome and Del Rosario held a news conference in Manila to condemn an unidentified state's "increasing assertion" in disputed waters, warning it was raising the risk of conflict. It was shockingly blunt language for a group that has long waved off criticism of its bland statements and lack of strong joint policies by citing the "ASEAN Way" -- its method of discrete, non-conflictual cooperation. China claims all of the South China Sea within a huge, looping "nine-dashed" line, and has rejected any "internationalization" of the dispute or direct bilateral negotiations. It has used the dotted line on maps dating back to the Nationalist government of the 1940s. Last month Beijing said it had begun "combat-ready" patrols around waters claimed by Vietnam after voicing strong opposition to a Vietnamese law asserting sovereignty over the Paracel and Spratly islands. Now, the Philippines and Vietnam, which have both seen a sharp rise in naval stand-offs with China, want ASEAN's backing to help them stand up to the regional giant. Without a strong ASEAN stance, those countries could push harder to expand alliances with the United States. In doing so, they must also be wary of losing out on closer trade and investment ties with China, Asia's dominant economy. ASEAN and China were due to start formal negotiations on a code of conduct to help manage the dispute in September, hoping to finalize a deal by the next ASEAN summit in November. Last week's acrimonious breakdown puts that in doubt at a time when naval tensions are rising sharply. How can ASEAN play a central role if it doesn't have a common position? Indonesian Foreign Minister Marty Natalegawa said on Monday, announcing he would tour ASEAN countries this week to try to salvage a joint statement. A hardening of positions on all sides, encouraged by growing nationalist sentiment over the dispute in several claimant states, is reducing the chance of a meaningful code of conduct being signed and increasing the chance of a naval clash. Adding to the pessimism over a code of conduct is the slate of ASEAN chair nations for the next two years - low-profile Brunei next year followed by China-dependant Myanmar in 2014. A binding set of rules would go some way toward making up for Asia's lack of security mechanisms to prevent naval tensions escalating into a full-blown conflict. NATO and the Soviet Union had those kind of mechanisms in place. If anything happened there were the rules of the game in place," said Ian Storey, a senior fellow at the Institute of Southeast Asian Studies in Singapore. There's no rules of the game in place here. (Additional reporting by Olivia Rondonuwu in Jakarta, Prak Chan Thul in Phnom Penh and Ben Blanchard in Beijing. Writing by Stuart Grudgings. Editing by Jason Szep and Jeremy Laurence)