By Randy Fabi

JAKARTA (Reuters) - Indonesia's president on Wednesday ordered an expansion of offshore oil exploration and commercial fishing in the waters near the Natuna Islands, the latest in a new campaign to assert sovereignty over the area in the South China Sea.

Indonesia has taken unprecedented steps in the past week to lay claim to the remote island chain, whose gas-rich waters Beijing recently said were subject to "over-lapping claims".

President Joko Widodo traveled to Natuna for the first time last week to hold a cabinet meeting aboard a warship, in what Indonesian officials described as the strongest message that has been given to China.

"Out of 16 blocks around Natuna, only five are producing," Widodo said before a cabinet meeting to discuss development of the area. "We want to push so that they enter production stage sooner."

The East Natuna gas field, being co-developed by state-owned Pertamina [PERTM.UL], Exxon Mobil Corp, Total SA and PTT Exploration and Production, is believed to hold one of the world's largest untapped gas reserves.

ConocoPhillips and Chevron Corp also hold stakes in the nearby South Natuna Sea Block B, but are looking to sell their stakes.

"Essentially, we want the Natuna area to be a hub for gas processing and related industries," said Rizal Ramli, coordinating minister for maritime affairs.

The government also wants to develop Indonesia's commercial fishing industry in Natuna, whose waters are regularly trawled by vessels from Vietnam, the Philippines, China and other nearby nations.

Widodo said current fishing production around Natuna was only around 9 percent of its potential.

Indonesia's navy has stepped up patrols around the islands after a series of face-offs between Indonesian naval vessels and Chinese fishing boats in the area.

Parliament on Tuesday approved a near 10 percent hike in defense spending to fund, among other things, major upgrades to military facilities in Natuna, located off the northwest coast of Borneo island.

Jakarta objects to Beijing's inclusion of waters around the Natuna Islands within China's "nine-dash line", a demarcation line used by Beijing to show its claims.

"We do not recognize China's nine-dash line and its claims of a traditional fishing zone," said Chief Security Minister Luhut Pandjaitan.

"Natuna is our territory. We want stability in the area."

China claims almost the entire South China Sea, where about $5 trillion worth of trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

(Additional reporting by the Jakarta bureau; Editing by Nick Macfie)