By Manuel Mogato

MANILA (Reuters) - Crushing Islamist militants in the Philippines will take precedence over territorial disputes in the South China Sea, the incoming defense minister said on Wednesday, and spending on military hardware would reflect that.

Ongoing kidnappings and the recent beheading of Western hostages by Abu Sayyaf rebels were hurting the country's reputation, and incoming president Rodrigo Duterte was frustrated by the failure to rein in the group, Delfin Lorenzana told Reuters.

He said the military would invest in more speed boats and helicopters to help flush out the group based on southern Jolo island, rather than divert funds into maritime security amid rising tensions and militarization in the South China Sea.

"These illegal activities, including kidnapping, must stop," Lorenzana, a former army general, said in his first interview with foreign media since being named defense minister. He is formally appointed on Thursday, along with Duterte.

"I share the frustrations of the president and our people. We have to end this once and for all. This problem is giving us a very bad image abroad."

Abu Sayyaf is believed to be linked to al Qaeda, and has also claimed it has ties to rival jihadi movement Islamic State, although in the latter case, authorities say there are no proven operational ties.

FOREIGN PRESSURE

Despite years of military offensives, the Philippines has made little concrete progress towards defeating Abu Sayyaf, since the group started operating in the 1990s.

Experts say that its network is funded in part by ransom money worth tens of millions of dollars, which it has used to buy modern boats, technology and weapons.

Manila is under renewed pressure to tackle Abu Sayyaf following the recent decapitation of two Canadian hostages and the kidnapping of Indonesian sailors which led to the suspension of coal shipments from the Philippines' main supplier.

The militants are holding at least 14 hostages to ransom - one Dutch, one Norwegian, five Filipinos and seven Indonesians.

Lorenzana's comments about his defense priorities will add to uncertainty about Duterte's position on the Philippines' sometimes bitter dispute with China over sovereignty in the South China Sea, a key global trade route.

Relations between the countries are particularly sensitive now, with an international tribunal in The Hague preparing to rule in a case brought by Manila that could undermine Beijing's claims to the disputed waters.

Duterte has been accused of flip-flopping, saying he would confront Beijing but also saying that he would engage through dialogue.

China claims almost the entire sea. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

Lorenzana said the defense budget should be spent on winning security at home rather than buying fighter jets to protect its waters, as the Philippines would not be going to war with any country. However, he said sovereignty was still a key issue.

"We cannot ignore the West Philippine Sea (South China Sea) because that is in our mandate," he said. "It's both a resource and a sovereignty issue."

Lorenzana, a Mindanao-born former special forces commander, said a plan was in place to take on Abu Sayyaf, although he declined to give specifics. He said the military would also assist Duterte's crime-fighting agenda.

"Our focus will be the Abu Sayyaf issue. Next will be to support the police in their all-out war against crime and drugs," he said.

(Reporting By Manuel Mogato; Editing by Martin Petty and Mike Collett-White)