MONTREAL, Oct 13 (Reuter) - Canadian Prime Minister Jean Chretien, putting commercial relations ahead of human rights concerns, ignored hundreds of protesters on Friday to extend a red carpet welcome to Chinese Premier Li Peng.

"We believe nations feel most secure when they see that the countless connections between them work to their mutual advantage," Chretien told Li at a gala dinner attended by nine provincial premiers.

"Engagement and dialogue -- not isolation and angry words -- are the building blocks of peace and security," he said. "Responsible states settle their disputes peacefully, and discuss their differences with respect."

To underline his view that trade with China would force the country to open up and change, the two sides signed agreements moving the sale of two nuclear reactors to China a step closer.

Preliminary agreements for the reactors, worth about C$3.5 billion Canadian (US$2.6 billion), were signed during a tour of China by Chretien and the nine premiers last November.

Li's visit, marked by a 19-gun salute in Ottawa on Friday morning before he continued to Montreal in the evening, is the return trip after last November's "Team Canada" journey to China. It falls on the 25th anniversary of diplomatic relations between the two countries.

Canada was one of the first major Western nations to sever official diplomatic relations with Taiwan and resume ties with Beijing on October 13, 1970. One day later China detonated a nuclear test, embarrassing the government of then-Prime Minister Pierre Trudeau.

Trudeau attended Friday's ceremonies as a guest of honour.

Several hundred noisy protesters outside the luxury hotel in Montreal where Li was being feted, as well as the activists who dogged his visit in Ottawa, plainly disagreed with Chretien's stance.

More than 130 Amnesty International protesters marched down a major Montreal avenue with their mouths gagged to protest against what they said was the silence of the Canadian government in the face of widespread Chinese human rights violations.

"Silence equals complicity when human rights violations occur," read one placard.

Other protesters demanded freedom for Tibet, the end to nuclear test explosions and the halting of human rights abuses. One woman demanded that her husband, who returned to China for a visit three years ago, be released from jail.

"Li Peng Butcher -- Out of Canada!" said one banner.

An effigy of Li hung from the turret of a 20-foot (six metre) long model of a Chinese army tank, painted with the date June 4, 1989, to mark the bloody crackdown on pro-democracy demonstrations in Tiananmen Square.

"I think it is a disgrace to Canada," anti-nuclear protester Chloe Sage said of the state visit. "Chretien is helping Li Peng with his image."

Li did not show any signs of being ruffled. "The facts have shown that although Canada and China differ in their respective social systems, historical backgrounds, cultural traditions and values, this has not and will not hinder fruitful cooperaiton between the two countries," he said.

Officials from both sides said the issue of human rights was raised only in a general sense during the day's meetings.

Li's visit also became a factor in Canadian domestic politics, dominated by French-speaking Quebec's October 30 referendum on whether to separate from Canada. Even though it was held in Quebec's largest city, separatist Quebec Premier Jacques Parizeau boycotted a meeting with Li just as as he had boycotted last year's visit to China in order to distance himself from Canadian leaders and issues.

Chretien laced his speech on Friday with references to the gains for Canada of working together rather than squabbling.