COLOMBO (AFP) - Chinese President Xi Jinping on Wednesday launched the construction of a US$1.4 billion (S$1.77 billion) port city in Sri Lanka's capital that will give Beijing a firmer foothold in the Indian Ocean region.

Mr Xi wrapped up his two-day visit to Sri Lanka by visiting Colombo harbour to kick off building of the port city, before heading to neighbouring giant India.

The new city, Sri Lanka's largest single foreign investment, is being built alongside an already existing Chinese-built container terminal, the only mega port in South Asia.

As part of the deal with Sri Lanka, China will gain ownership of one third of the total 233ha of reclaimed land that the new port city will occupy.

Sri Lanka is a midway point on one of the world's busiest international shipping lanes that Beijing wants to secure as a maritime silk road of the 21st century.

Colombo hopes the city, which will have a Formula One track and a luxury marina, will attract another US$5 billion in foreign investment for property development.

Late on Tuesday, Mr Xi and Sri Lankan President Mahinda Rajapakse announced increased defence and maritime security ties and pledged to deepen their "strategic cooperative partnership".

On the first day of his visit, Mr Xi launched Sri Lanka's biggest electricity generator, a Chinese-funded US$1.3 billion 900MW coal power plant located less than 200km from India.

China's huge investments in Sri Lanka and other South Asian nations, in India's neighbourhood, have caused unease in New Delhi.

Some officials in New Delhi have voiced fears in the past that China's growing engagement in the region is a deliberate strategy to encircle India.