A bloody outbreak of fighting that has ended a 17-year ceasefire between Burmese government forces and a tribal militia was partly caused by the expansion of Chinese hydropower along the Irrawaddy river, conservationists claim.

Dozens of people in northern Burma have reportedly been killed in the clashes between government troops and the Kachin Independence Army. Thousands more are trying to flee across the border after fierce fighting erupted this month around the construction sites of two Chinese-financed dams in the region.

Amid growing fears that the conflict could escalate, the Burma Rivers Network said China's massive hydropower investments had widened the gulf between the government – which wants to benefit from cross-border electricity sales – and Kachin independence groups, which fear the dams will bring environmental, cultural and social disruption.

"The conflict is closely related to the dams. The government has sent in troops because it wants to gain control of a region that hosts major Chinese investments in hydropower," Sai Sai, of the Burma Rivers Network, told the Guardian.

Details of the fighting remain sketchy. The authorities have yet to acknowledge the conflict. The Irrawaddy magazine – which is published online by overseas critics of the Rangoon government – said stability in northern Burma had deteriorated rapidly with several explosions in the Kachin state capital, Myitkyina, the government closure of Sino-Burmese trading routes and the destruction of at least three bridges.

Burma Rivers Network said power transmission pylons at Dapein dam had been toppled, the fighting had spread to Shweli dam and Kachin forces had vowed to widen the conflict to all areas under their control. The death toll is said to be close to 50.

Dams are by no means the only cause of tension in the region. The uneasy standoff was shaken last year when the Kachin Independence Army rejected a proposal to fall under central government control as a border guard force. Since then the two sides have jostled over territory.

But China's plans to finance, build and generate electricity from at least seven dams in the region may have given the government a greater economic and diplomatic incentive to take control of strategically important areas that have long been in the hands of Kachin forces. According to Burma Rivers Network the investment is worth $3.6bn and will result in annual power sales of $500m.

The state-controlled firm behind the projects – China Power Investment – refused to comment. "We don't accept any interview on our overseas projects. Every company has their own business secrets," said a spokesperson from the Hong Kong-listed corporation.

The Kachin Independence Organisation has co-operated with most of China's engineering plans, which are seen as beneficial to the economic development of the impoverished region. But it has fiercely opposed the biggest of the nine-planned dams: a 3,600MW hydropower plant at Myitsone, which is an area of great cultural and ecological significance. The environmental impact assessment on this first dam on Burma's stretch of the Irrawaddy also expressed grave concerns.

In March the Kachin Independence Organisation sent an open letter to the Chinese government calling for the plan to be shelved: "We would not be responsible if civil war broke out because of this hydropower plant and dam construction."

China has repeatedly emphasised the need for stability along its borders but it faces awkward questions about the conflict – which broke out a few weeks after President Thein Sein of Burma made his first visit to Beijing since taking office.

Stephanie Kleine-Ahlbrandt, China adviser at International Crisis Group, said: "Hydropower projects in Myanmar are fostering strong popular resentment due to their unequal benefit distribution and lack of transparency, as well as environmental damage and forced displacement of communities.

"Without addressing the negative impact of its companies China risks recurring instability on its border with Myanmar."