* China called 'ground zero' for piracy, counterfeiting

* Groups also protest China indigenous innovation plans

* Trade panel to assess damage to US economy

By Doug Palmer

WASHINGTON (Reuters) - U.S. business groups
Tuesday besieged the U.S. International Trade Commission with
complaints about billions of dollars of lost sales due to
Chinese counterfeit goods and government policies that threaten
to shut American companies out of the market.

"Unfortunately, the stark reality is that China remains
'ground zero' for international product counterfeiting and
piracy," Shaun Donelly, senior director for international
business policy at the National Association of Manufacturers,
told the commission.

The hearing reflects the growing concern in Congress about
Chinese trade practices.

By order of the Senate Finance Committee, the ITC is
attempting to quantify the economic damage done to the United
States and various business sectors by high Chinese rates of
intellectual property theft and "indigenous innovation"
policies said to discriminate against foreign firms.

The panel, which will hold second day of a hearings
Wednesday, hopes to deliver its report by Nov. 19.

It invited Chinese government officials to testify but they
declined, an ITC spokeswoman said.

U.S. manufacturers, large and small and in a wide range of
sectors ranging from pharmaceuticals and personal care products
to auto parts and chemicals, report more and more fake goods
showing up in U.S. and international markets.

"In the vast majority of cases, those IPR (intellectual
property rights)-infringing products trace their roots,
directly or indirectly, back to China," Donnelly said.

Robert Holleyman, president of the Business Software
Alliance, said a "staggering" 79 percent of software installed
in China last year was not paid for, higher than in any other
major economy, including India and Russia.

About 45 percent, or $3.4 billion, of that was
illegally-used U.S. software, Holleyman said.

Business groups acknowledged China had made some progress
on their concerns, but said it was far less than desired.

"Despite China's commitments to the U.S. government over
the last four years, the level of piracy and counterfeiting
remains extremely high, particularly with regard to film, music
and software," said Calman Cohen, president of the Emergency
Committee for American Trade.

In addition, new concerns have arisen over Chinese
industrial polices that U.S. businesses say discriminate
against foreign firms in an effort to increase China's share of
the world's most valuable trademarks and patents.

"The two common threads running through most of our
challenges with China are policies that advantage domestic
companies at the expense of foreign firms and that attempt to
force the transfer of technologies," said John Neuffer, vice
president for global policy at the Information Technology
Industry Council.

Jeremie Waterman, senior director for Greater China, at the
U.S. Chamber of Commerce, said China's indigenous innovation
policies could potentially hurt U.S. companies more than the
country's huge sales of pirated and counterfeit goods.

This latest challenge reflects a "goverment-directed or at
least government-motivated strategy to lessen China's perceived
reliance on foreign innovations and intellectual property,"
rather than a mere lack of political will to crackdown on
copyright and patent thieves, he said.

(Reporting by Doug Palmer; Editing by Cynthia Osterman)