By Sergio Goncalves

LISBON, Feb 23 (Reuters) - The U.S. ambassador to Portugal has urged Lisbon to replace its ageing F-16 fighter jets with Lockheed Martin's LMT.N F-35, saying the stealth jet would ensure interoperability with Europe's top-tier air forces.

Ambassador John Arrigo told CNN Portugal late on Sunday that he aimed to draw on his business experience to help Portugal ramp up defence spending to NATO's target of 5% of gross domestic product by 2035 from the current 2%.

"F-35 is the best fighter - it's a fifth-generation stealth fighter, it'll get them (the Portuguese Air Force) into the Champions League when it comes to the EU," Arrigo said.

Portuguese Defence Minister Nuno Melo said in November that the selection process for the replacement fighters had not yet started.

Arrigo said more than 900 of the F-35s were in service or on order across Europe and that for "interoperability, the F-35 is definitely the way to go," noting also that 25% of the plane was made with European parts.

On relations with China, the ambassador said the Trump administration was not pushing Portugal to choose between Washington and Beijing or decouple from China, The U.S. was promoting "de-risking", he said, ensuring cybersecurity and investment screening.

Chinese companies expanded in Portugal following the 2011-14 bailout, when lower asset prices attracted foreign investors.

Portugal secured a 78 billion euro bailout in May 2011 from the EU, IMF and ECB after soaring borrowing costs during the eurozone debt crisis cut it off from markets, but had to agree to harsh austerity that sparked a deep recession.

China Three Gorges holds 21.4% of utility EDP EDP.LS, China State Grid owns 25% of grid operator REN RE.LS, and Hong Kong‑listed Fosun controls 20% of bank Millennium BCP BCP.LS and 85% of insurer Fidelidade.

Arrigo said the U.S. sees itself as Portugal's "best partner but wants to keep any adversary... at arm's length."

Portugal joined China's Belt and Road Initiative in December 2018. Arrigo said Lisbon's partnership with the U.S. would "flourish" if Lisbon exited, as Italy did in 2023.

(Reporting by Sergio Goncalves; Editing by Kate Mayberry)

((sergio.goncalves@thomsonreuters.com; +351213509204; Reuters Messaging: sergio.goncalves.reuters.com@reuters.net/))