Riot police in Burma used incendiary phosphorus shells along with teargas and water cannon in an overnight operation to disperse thousands of villagers protesting against a vast copper mining project, activists claimed on Thursday.

After decades of repressive military rule, the demonstrations at the Monywa mine in the north-west, run by the military and a subsidiary of a Chinese arms manufacturer, have become a test of the Burma's commitment to reform, as protesters explore newfound freedoms, including a relaxation of laws on protests that took effect in July.

The crackdown will embarrass Washington. Barack Obama visited Burma earlier this month, the first serving US president to do so, to encourage reforms.

Activists said at least 50 people had been injured, many by incendiary devices hurled into their camps by the police. Local media described the devices as "phosphorus bombs". According to a doctor at the hospital in Monywa, 28 Buddhist monks had received treatment for burns.

Witnesses said truckloads of police arrived at six camps near the mine in the Sagaing region in Burma's north-west, where thousands have demonstrated against a $1bn expansion of the project, which will displace dozens of villages. "We prepared to form ranks as the police came in. But when firebombs exploded, we fled," said Ashin Zawana, one of the monks protesting at the site.

Myo Thant, a member of the 88 Generation Students Group that has long opposed military rule, said 22 monks and one other person were in hospital. He said police had turned water cannon on the protesters with some officers using "strange weapons".

"The stuff from these canisters got caught on the clothes and bodies of the victims. When they shook their robes to remove this stuff, fire started," he said.

U Eidaka, 45, a monk who told the Guardian he sustained minor burns on his back, said that "whatever confidence" demonstrators once had in the new government in Burma was gone.

Zaw Htay, a government spokesman, told Reuters the police had used only water cannon, teargas and smoke bombs.

The protests are not just a test for the reformist president, Thein Sein, whose efforts to bring a form of democracy to Burma were praised by Obama during his visit, but also for human rights campaigner and Nobel Laureate Aung San Suu Kyi.

The mine protest also illustrates growing resentment towards Chinese firms that have invested heavily in Burma over recent years.

Burma, which has vast natural resources, is the focus of fierce competition for influence between China, which was able to build tight economic and political ties with the junta during long years of western sanctions, India and western countries led by the US.

The crackdown at the mine will dismay optimists and may embarrass Washington, where officials justified Obama's controversial trip as a step that would encourage further reform. "This is like the crackdown on monks in 2007," Zawana the monk said, referring to the brutal repression of peaceful protests five years ago. "We find it hard to believe now whether the new civilian government is any different from the previous military regime at that time."

When the Guardian visited Monywa earlier this week, the air around the plant was filled with the acrid stench of sulphuric acid. Local people said farmland around the plant could no longer be worked and mounting numbers of local children were being born blind. The cause, they claimed, was emissions from the mine's sulphuric acid factory as well as outflow from mountains of rust-red waste, dumped over 15 years with little concern for the environment. Huge chunks of the hills had been scraped away and swaths of woodland felled.

"These mountains belong to the public but they are being destroyed for copper. This project must stop if the new government believes its own slogans about good governance and clean government and is truly sympathetic to the sufferings of the villagers here," said U Tiloka, a monk demonstrating alongside the villagers.

Though the protests started three months ago, they had gathered pace in recent weeks. Hundreds of villagers, joined by monks, had blockaded the gates of the acid plant.

Posters reading "General Strike" written in red Burmese letters were hung from its perimeter fence. Despite the presence of security forces, villagers blocked heavy bulldozers and trucks. Such open dissent was inconceivable only 18 months ago.

Organisers have given fiery speeches directed at China. "Driving out [the Chinese] company is our aim," Thwe Thwe Win, 24, a vegetable seller from the village of Wat Hmei, threatened by the expansion plans, shouted into the hand-held loudspeaker outside the plant last week. "No Chinese on our soil. No Chinese here near our village," the crowd shouted back.

Win, who was briefly detained in September, said her family had already lost land where they once grew vegetables. "The project officials said they would hire our land for three years. And they paid us some money for three years' losses of our crops. But we cannot reclaim these lands again now. We were cheated," she said.

A crackdown was long feared. Activists at the mine earlier this week said the authorities were simply waiting for the publicity around the visit of the US president to die down.

Aung Min, a top government minister, has visited the protest site and spoke of Burma's "debt of gratitude" to China. Suspending the project would further damage relations already strained in by the new quasi-civilian government's decision last year to halt the $3.6bn Myitsone hydropower project constructed and financed by the Chinese government in the north of the country, following a public outcry about the project's potential environmental effects. Most of the energy generated by the Myitsone project would have gone to China.

"You minister owe gratitude to the Chinese. We the people owe none to the Chinese," the minister was told by one local woman, a reference to the vast riches earned by senior military generals and their cronies from business deals over recent decades.

The Global Times, an influential tabloid published by China's Communist Party mouthpiece, the People's Daily, said in an editorial on Thursday it would be a "lose-lose situation for China and Myanmar if the project is halted".

"Only third parties, including some Western forces, will be glad to see this result," it said, blaming "some Westerners" and non-government organizations for instigating the protests.

A sign that the authorities were losing patience with the protesters came on Monday when nearly a hundred people gathered to demand the suspension of the Monywa project. At least six organisers were detained in the notorious Insein prison on charges of defaming the nation, activists said. To the disappointment of many, Aung San Suu Kyi has said that simply suspending production at the plant could damage the country's image in the international community.

In recent days, local officials had given villagers and monks a series of deadlines to end their protest and riot police were reinforced. The demonstrators remained defiant. "We will not leave here. If the authorities arrest us, we will let them arrest us," said Zawana. Twenty four hours later the security forces moved in.