Protesters in Tibet's capital Lhasa burnt shops and vehicles and yelled for independence today as the region was hit by its biggest protests for nearly two decades, testing China's grip months before the Olympics.

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Peaceful street marches by Tibetan Buddhist monks over previous days gave way to bigger scenes of violence and resentment in the remote, mountainous region.

The US Embassy said it had received reports of gunfire in Lhasa and advised its citizens to stay indoors.

"Now it's very chaotic outside," an ethnic Tibetan resident said by telephone.

"People have been burning cars and motorbikes and buses. There is smoke everywhere and they have been throwing rocks and breaking windows. We're scared."

Another ethnic Tibetan resident said there were "protests everywhere".

"It's no longer just the monks. Now they have been joined by lots of residents," the man said.

The eruption of anger comes despite China's repeated claims the Tibetan people are grateful for improved lives, and it threatens to stain preparations for the Beijing Olympics.

"We feel that this very heavy-handed response is not commensurate with the very moderate approach of the demonstrators peacefully expressing their aspirations," said Thupten Samphel, a spokesman in Dharamsala in India for the Central Tibetan Administration, the Tibetan government-in-exile.

"We appeal to the international community to persuade the Chinese authorities to deal with these demonstrations moderately. We believe to address their grievances is much more important than to physically suppress them."

Chinese rule in remote, Buddhist Tibet has become a focus for critics in the run-up to the August Games, with global marches this week to mark the 49th anniversary of a failed uprising against Communist rule spilling into Tibet itself.

Those marches apparently emboldened Buddhist monks to take to Lhasa's streets, defying a heavy police presence and reports of lockdowns on several monasteries, sources with knowledge of the region said.

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Today, 300 to 400 residents and monks demonstrated in Lhasa, a source cited a witness as saying, capping the protests that echoed the anti-government demonstrations that rocked neighbour Burma last year.

"Some are angry and some are scared. The security forces are checking houses to see if any monks are hiding," said the source, who is in touch with Tibetan residents.

More than 10 monks had been arrested and tanks were patrolling the square near the Potala Palace, the source said, referring to one of the architectural wonders of the world once the winter residence of Tibet's spiritual leader, the Dalai Lama.

Witnesses said a number of shops were set on fire, and a report from China's Xinhua news agency said the Tromsikhang Market in central Lhasa was also in flames.

Residents spoke of general chaos around the city, and one Tibetan man said Tibetans and minority Hui Muslim traders from other parts were fighting each other with rocks and knives.

A Han Chinese resident said the protests were being directed at the city's Chinese population.

"The Han Chinese are really scared," the resident said. "We have been told not to go outside."

"It is very chaotic ... There is lots of smoke and police around," said another Han Chinese man. An editor at the Lhasa Evening News said staff were staying inside.

Two residents reached by telephone referred to martial law.

But that could not be confirmed and China's State Council Information Office declined to comment, referring only to remarks made yesterday by a Foreign Ministry spokesman who said the protesters were "seeking to spark social turmoil".

The demonstrations in Lhasa earlier also spilled into at least one other ethnic Tibetan area of China.

Hundreds of monks from the Labrang monastery in the northwestern province of Gansu led a march through the town of Xiahe, the Free Tibet Campaign said, citing sources in Dharamsala, home to Tibet's government-in-exile.