CANBERRA (Reuters) - More than 10,000 Chinese Australians staged the biggest pro-Beijing rally of the Olympic torch relay on Thursday and drowned out Tibetan demonstrators in a sea of red Chinese flags.

Protests and tight security have followed the torch around the world over the past month, putting China's domestic and foreign policies under the spotlight before the Games in August.

Anti-Chinese protests during the previous relay legs have sparked a wave of patriotism amongst Chinese at home and abroad, and on Thursday thousands of Chinese chanting "One China" packed the start and finish of the relay in the Australian capital.

Police made seven arrests, but for the most part the event was peaceful.

"This is a magnificent day for us today to show that Australia can have a peaceful rally. Watching overseas protests, I felt shamed that they can behave like that," Wellington Lee, from the Chinese Association of Victoria state, told Reuters.

Chinese six-deep lined the 16-km (10-mile) relay route and hundreds of cars drove around Canberra carrying Chinese flags.

"It was highly organised," Free-Tibet supporter and Australian Greens Senator Bob Brown told Reuters. "Australians will feel a little bit uncomfortable by the fact that communist China came to town and just showed it can buy anything."

China denied the charge. A 2006 census recorded 207,000 people in Australia who were born in China.

Unlike in London, Paris or San Francisco, where torch bearers were jostled by anti-Beijing protesters as they ran, in Canberra a heavy police presence, steel barricades and the city's wide boulevards ensured runners were unobstructed.

Scuffles broke out between Tibetan protesters and China supporters, who included Australian Chinese and Chinese students in Australia, before the start of the relay and as a few Tibetan protesters tried to block the runners.

Beijing had hoped the torch's progress would be a symbol of unity in the run-up to the Beijing Games. But it has turned into a public relations nightmare with China's crackdown in Tibet at the core of relay protests.

Beijing has accused the Dalai Lama of being behind March 14 riots in Tibet's capital, Lhasa, and unrest that followed in other ethnic Tibetan areas, as part of a bid for Tibetan independence and to ruin the Olympics.

"STOP VILIFYING DALAI LAMA"

In Washington, Deputy U.S. Secretary of State John Negroponte called on China to stop vilifying the Dalai Lama and instead start talks with the exiled Tibetan spiritual leader.

Volkswagen, a sponsor of the Games, urged the Beijing government to open up Chinese society by embracing the spirit of the Olympics, taking place from August 8-24.

"The Olympics offer China and its people a unique opportunity not only to continue their economic development, but above all to further open up their society," Chief Executive Martin Winterkorn told shareholders at the VW annual meeting.

"We hope and firmly believe that our Chinese partners will seize this unique opportunity."

The European Parliament had urged EU leaders to boycott the opening ceremony at the Games unless China starts talks with the Dalai Lama. In retaliation, there have been Chinese calls to boycott European, especially French, businesses.

EU Trade Commissioner Peter Mandelson spoke out against boycott calls and said they served only to "deepen differences, create massive resentment and make dialogue much harder".

State television reported on talks Chinese President Hu Jintao held with Christian Poncelet, the president of the French Senate, concerning the torch relay problems.

"Recently, a series of things happened in France that were unfriendly to the Chinese people," Hu was quoted as saying. "Especially that the Olympic torch relay was disturbed and attacked in Paris."

Poncelet was quoted as saying he was "sad and regretted" what happened during the Paris relay leg.

On Saturday, the torch will be run through Nagano, Japan, where officials have changed the route due to security concerns and complaints from locals. The route for the torch's visit to Ho Chi Minh City on April 29 still has not been revealed.

(Additional reporting by Grant McCool in Hanoi; and Chris Buckley and Jiang Yan in Beijing; Writing by Nick Macfie; Editing by Alex Richardson)

("Countdown to Beijing Olympics" blog at http://blogs.reuters.com/china )