Opium production increased for the third successive year and rose by 11 percent this year, with Shan State providing 95 percent of the poppy in Myanmar, the world's second-biggest opium producer after Afghanistan, according to the United Nations Office on Drugs and Crime (UNODC).
"Increased instability in northeastern Myanmar is affecting the opium market. (Some ethnic groups) ... are selling drugs to buy weapons, and moving stocks to avoid detection," said UNODC Executive Director Antonio Maria Costa.
Myanmar's army has maintained a sizable presence over the past few months in Shan State, where rebel militias are braced for an offensive that analysts said could turn into a protracted conflict, creating a refugee crisis for neighbouring China.
The junta wants ethnic groups to take part in a general election next year and has told local militias to disarm and join a government-run border patrol force or be wiped out, according to activists in Shan State.
The military overwhelmed and disarmed the Kokang group, the weakest of the ethnic armies, in August after several days of fighting. That triggered an exodus of more than 37,000 refugees across the border and strained ties with China, its only real diplomatic ally.
The United Wa State Army, a 20,000-strong ethnic Chinese militia labelled a narcotics cartel by the United States, has refused to disarm and is preparing for an imminent attack, media reports and activists say.
UNODC said the amount of land dedicated to growing opium -- a thick paste from poppy used to make heroin -- had increased by 50 percent since 2006 to 31,700 hectares in Myanmar.
Despite the rise in cultivation, the report said the potential value of opium production in Myanmar had fallen by 15 percent to $104 million in 2009 from $123 million.
In neighbouring Laos, opium cultivation had increased by 19 percent but the total remained low at 1,900 hectares.
However, with opium fetching $1,326 per kg, the price was still attractive for farmers at a time when the value of other crops was falling, the report said.
(Reporting by Martin Petty; Editing by Alan Raybould)
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