By Matt Spetalnick and Martin Petty

HO CHI MINH CITY, Vietnam (Reuters) - U.S. President Barack Obama chided Vietnam on political freedoms on Tuesday after critics of its communist-run government were prevented from meeting him in Hanoi, a discordant note on a trip otherwise steeped in amity between the former foes.

Tens of thousands turned out to welcome Obama on the second leg of his visit, Ho Chi Minh City, which was called Saigon until April 1975 when North Vietnamese tanks rolled in to bring U.S.-backed South Vietnam under communist rule.

Many in the crowds lining the streets chanted "Obama, Obama," some held handwritten signs reading "Obama, we love you," and one woman held a boy dressed in a Captain America costume, complete with shield.

Underlining the importance of the growing economic ties between the countries, Obama held an open forum with young entrepreneurs and laid out the benefits of the Trans-Pacific Partnership (TPP) trade pact between 12 Pacific Rim countries.

The high point of his visit came on Monday, with an announcement that Washington was scrapping its embargo on the sale of lethal arms to Vietnam. That clears the biggest hurdle remaining between two countries drawn together by concern over China's military build-up.

Critics said that by removing the ban, a vestige of the Vietnam War, Washington had put concerns about Beijing's assertiveness in the South China Sea first and given up a critical lever to press Hanoi for improvements in human rights.

'FREEDOMS STILL A CONCERN'

One prominent intellectual, Nguyen Quang A, told Reuters that about 10 policemen had come to his house at 6:30 a.m. and put him in a car that was driven out of the capital until Obama was about to leave.

An outspoken lawyer, Ha Huy Son, said he was also stopped from joining Obama's meeting with six other civil society leaders. Human Rights Watch said a journalist who was also invited had been arrested on Monday.

Quang A, a former IT entrepreneur, was one of more than 100 Vietnamese who tried to run as independents for last weekend's election to the parliament, which is tightly controlled by the Communist Party. Almost all failed to get on the ballot.

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Before he was taken away, Quang A posted on Facebook a photograph of himself dressing for the meeting with Obama, with the message: "Before going. May be intercepted, arrested. Advising so people know."

Vietnam's foreign ministry did not immediately respond to a request for comment.

Obama noted that several activists had been blocked from meeting him and said this was an indication that, despite some "modest" legal reforms "there are still folks who find it very difficult to assemble and organize peacefully around issues that they care deeply about."

"There are still areas of significant concern in terms of freedom of speech, freedom of assembly, accountability with respect to government," he said.

U.S. officials said that lifting the arms embargo would make it easier for Washington to engage with Vietnam on such issues.

In Washington, members of the U.S. Congress, including Republicans as well as some of Obama's fellow Democrats, criticized the policy shift alongside about a dozen Vietnamese human rights activists.

"This is the definition of a bad deal," Republican Representative Chris Smith said at a news conference. "This is not smart diplomacy, it is surrender of U.S. interests and values."

Democratic Representative Adam Lowenthal said, "I am very disappointed that we lost yet another opportunity to elicit any kind of commitment from the Vietnamese government on improving the human rights of the Vietnamese people."

TOUTING THE TPP

In a speech before leaving Hanoi, Obama stressed the importance of freedom of navigation in the South China Sea, where China has been turning remote outcrops into islands with runways and harbors.

"Big nations should not bully small ones. Disputes should be resolved peacefully," he said, without naming China, which claims sovereignty over most of the South China Sea.

China's Global Times, run by the Communist Party's official People's Daily, said the decision to lift the embargo showed a willingness to relax standards on human rights for the sake of containing China.

U.S. Secretary of State John Kerry, in Ho Chi Minh City with Obama, told reporters that Washington's efforts to normalize relations with Vietnam were not aimed at China.

"This is not about China. Nothing that we did here or (are) arguing here is focused on China. It is focused on the fastest-growing marketplace in the world," Kerry said.

Obama interviewed three entrepreneurs at Ho Chi Minh City's "Dreamplex," which hosts budget tech start-ups with support of angel investors and Silicon Valley funds. He also touted the benefits of the Trans-Pacific Partnership, especially for unlocking entrepreneurial innovation.

Vietnam's manufacturing and export-led economy is seen as the biggest TPP beneficiary. Annual U.S.-Vietnam trade swelled to $45 billion last year from $450 million when ties were normalized. Washington is a big buyer of Vietnam's televisions, smartphones, clothing and seafood.

But the TPP, which would remove tariffs across a 12-nation bloc worth a combined $28 trillion of gross domestic product, is not a done deal. Opposition is expected in Washington amid concern about competition and a loss of U.S. jobs.

(Additional reporting by My Pham, Ho Binh Minh and Mai Nguyen in HANOI and Megan Cassella in WASHINGTON; Writing by John Chalmers; Editing by Clarence Fernandez, Toni Reinhold)