BEIJING (Reuters) - The European Union on Tuesday accused a Chinese government mouthpiece of censoring and twisting the words of its ambassador, amid a flare-up in trade disputes between the two economic giants.

In a news release, the European Union delegation in China alleged that the official China Daily newspaper had published an article on EU-China relations that "contained factual inaccuracies".

China Daily granted the EU ambassador a right to reply, but edited the article to change the meaning of his words, refusing to publish the piece unless the changes were accepted, the delegation said.

China Daily did not immediately respond to telephone calls seeking comment. The EU delegation in China did not immediately respond to an e-mailed request for the China Daily-edited version of the ambassador's article.

The tension comes as the EU and China face off over several trade disputes, such as Chinese steel flooding the trading bloc at low prices and accusations of unfair market access for foreign companies in the world's second largest economy.

The European Union has been debating whether to grant China "market economy status", given the Chinese government's hand in guiding industry and markets.

China says the status is its right come December, which marks 15 years since it joined the WTO. Failure to do so could spark a trade war.

"Protectionism has dominated the minds of those in EU institutions," said the China Daily article which sparked the barbed exchange, published on Oct 25.

"The EU should remember that mutual cooperation is the only way ahead," it said.

Tuesday's news release included the original, unedited response to China Daily by the EU ambassador to China, Hans Dietmar Schweisgut.

The EU has engaged with China on several projects, from the Beijing-led Asian Infrastructure Investment Bank to the new Silk Road initiative, and remains in favor of free trade, he wrote.

"We also need fair trade," he said. "Therefore modernizing the EU's trade defense instruments should not be seen as protectionism, but rather, as a mechanism to better promote free and, above all, fair, trade."

"The EU wants a China which is economically more open and stable, with significantly improved market access for foreign companies as well as a level playing field for fair competition and without discrimination against our commercial actors," Schweisgut wrote.

"Otherwise EU businesses cannot but conclude that the business climate for them in China continues to deteriorate."

(Reporting by Paul Carsten; Additional reporting by Beijing Newsroom; Editing by Clarence Fernandez)