BRASILIA (Reuters) - Twelve South American countries founded a union on Friday aimed at boosting economic integration and political cohesion, but the region’s bitter rivalries stymied ambitious plans on defense and trade.

Chile's President Michelle Bachelet (R), Bolivia's President Evo Morales (L) and Brazil's President Luiz Inacio Lula da Silva attend a news conference in the South American Union of Nations (UNASUR) summit at the Itamaraty Palace in Brasilia May 23, 2008. REUTERS/Roberto Jayme

The heads of states signed a treaty that creates the South American Union of Nations, or Unasur, as well as plans for energy, infrastructure and financing projects.

Brazilian President Luiz Inacio Lula da Silva hailed Unasur, which aspires to become like the European Union, as a sign that South America was becoming a “global actor” and said the differences between governments were a sign of vitality.

“The instability some want to see in our continent is a sign of life, especially political life,” he said. “There’s no democracy without people (protesting) in the streets.”

Unasur includes a rotating presidency, biannual meetings of foreign ministers and a parliament in Bolivia, marking progress toward greater unity in a region that is enjoying a period of relative economic stability.

As the major regional power, Brazil has for years been trying to unite South America as a counterbalance to U.S. and European economic interests in the region.

But South America has been strained by political divisions pitting U.S. critics such as Bolivia and Venezuela that favor state intervention in the economy against market-friendly countries like Chile and Colombia, with closer U.S. ties.

The new group falls short of ambitious plans for economic and security integration, including the original intention to merge the South American customs union Mercosur and the Andean Community trading bloc.

Unasur members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela.

‘DEAD POINT’

Colombia turned down the presidency because of its tensions with Venezuela and Ecuador and rejected a Brazilian proposal to create a regional defense council. Chile will lead the group first instead.

Colombia says its problems with terrorism make military cooperation difficult, in a reference to the FARC rebel group, whose fighters it has accused Ecuador of harboring.

Colombian President Alvaro Uribe said after a meeting with Lula that Unasur members should classify as terrorists all groups that violently attack democracy in the region.

Unlike Colombia, Brazil and other countries in the region do not consider the FARC a terrorist group.

“Unfortunately our relations with the Colombian government are in a very deplorable situation, at a dead point,” Ecuadorean President Rafael Correa told reporters.

Former Ecuadorean President Rodrigo Borja turned down the post of secretary-general, saying it lacked decision-making powers. Despite the obvious tensions at the summit, leaders said it was an important step forward for a region that has rarely spoken with one voice.

“Unasur means that we can be a global actor, that we have a single voice that can be heard,” Chilean President Michelle Bachelet said.

After Colombia’s rejection of the defense council, the other 11 members agreed to establish a task force to present a revised proposal within 3 months.

Lula met the region’s more radical left-wing leaders of Venezuela, Ecuador and Bolivia before the summit, urging them to put aside differences with other countries in the region, a senior diplomat told Reuters.

Venezuela blamed Washington on Friday for fueling disputes through its ally Colombia.

“The empire is counter-attacking ... Washington is rebuilding the oligarchies” in South America, Venezuelan President Hugo Chavez said in a TV interview after the summit.

The United States is mobilizing oligarchies and opposition politicians in Bolivia and Argentina, he said.