* Avoid militarizing claims in S.China Sea, Obama says
* Applauds ASEAN moves to create code of conduct in sea
* Malaysia's Najib urges counter-message to 'terrorists'
* Attacks overshadow ASEAN's move to launch economic zone
* Obama says his TPP will enhance security and prosperity (Updates with Obama comments on South China Sea)
By Matt Spetalnick and Martin Petty
KUALA LUMPUR, Nov 21 (Reuters) - U.S. President Barack Obama said on Saturday that countries should stop building artificial islands and militarising their claims in the disputed South China Sea.
"For the sake of regional stability the claimants should halt reclamation, construction and militarisation of disputed areas," Obama told a meeting between the United States and leaders of the 10 Association of South East Asian Nations (ASEAN).
China insists it has undisputed sovereignty over most of the South China Sea, a claim that overlaps with four ASEAN countries.
China has been transforming reefs in the Spratly archipelago into artificial islands and has built airfields and other facililties on them. This has caused ripples of alarm in much of East Asia about China's intentions and freedom of navigation in a waterway through which $5 trillion in ship-borne trade passes annually.
Obama said he commended ASEAN for working to create a code of conduct for the South China Sea "including the peaceful resolution of disputes, freedom of navigation and freedom of overflight."
Earlier this month, U.S. B-52 bombers flew near China's artificial islands, signaling Washington's determination to challenge Beijing over the disputed sea.
China has said it does not want the South China Sea issue to be the focus of the meetings in Kuala Lumpur. Prime Minister Li Keqiang has yet to comment on the issue.
CONFRONT ISLAMIST EXTREMISTS
Malaysian Prime Minister Najib Razak opened the weekend series of meetings earlier on Saturday, calling on world leaders to confront Islamist extremism. The "barbaric acts" of "terrorists" do not represent any race or religion, he declared.
Islamist militants killed 19 people in an attack on a hotel in Mali on Friday before Malian commandos stormed the building and rescued 170 people, many of them foreigners. This came a week after Islamic State militants killed 129 people in coordinated attacks in Paris.
"The perpetrators of these cowardly and barbaric acts do not represent any race, religion or creed, nor should we allow them to claim to do so," Najib said in his opening speech at the ASEAN summit.
"They are terrorists and should be confronted as such, with the full force of the law."
Malaysia has deployed extraordinary security measures around Kuala Lumpur as leaders from 18 countries, including Obama, arrived for the series of summits.
Obama said on Saturday the Mali hotel attacks only stiffened the resolve of the United States and its allies, which would be relentless in fighting those targeting its citizens and would allow militants no safe haven.
"We will continue to root out terrorist networks," Obama told a meeting of business executives. "We will not allow these killers to have a safe haven."
ECONOMIC COMMUNITY
Most of the leaders arrived from the Asia-Pacific Economic Cooperation (APEC) summit in Manila. Both the APEC meeting and the ASEAN summit typically focus on economic issues but have been overshadowed by the terrorist attacks.
Najib said he had intended to open the summit to talk about an economic community that ASEAN is launching this weekend in a region of 622 million people with a combined economic output of $2.5 trillion.
"But the events of recent days and weeks have cast a shadow over us all," he said.
He said predominantly Islamic countries such as Malaysia have a duty to expose as lies the "ideology propagated by these extremists that is the cause of this sadistic violence."
Obama said ASEAN's community would not only help integrate economies in the strategic region but "improve regional stability".
Obama said his signature free trade agreement, known as the Trans-Pacific Partnership (TPP), "will bind the United States even closer to some of our strongest allies in Asia".
"Our alliances are the foundation for our security which becomes the foundation for our prosperity, which allows us to invest in the source of our strength, including our alliances," he told the ASEAN business executives.
The Asia-Pacific countries in the TPP include Japan, Singapore, Malaysia, Vietnam, Brunei, New Zealand and Australia, all of whom are attending the Malaysia meetings.