LONDON (Reuters) - Britain's parliament has rejected Chinese calls to scrap an inquiry into Hong Kong's progress towards democracy, a senior lawmaker said, warning that reforms there may violate a 1984 deal on the former British colony's sovereignty.

Britain handed Hong Kong back to China in 1997 under an agreement which said it could keep its wide-ranging freedoms and autonomy. But pro-democracy activists say a Chinese decision to tightly curb nominations for a 2017 leadership vote means Hong Kong risks ending up with a "fake" democracy.

With tensions rising in the special administrative region, Britain's parliament launched an inquiry in July, prompting the Chinese ambassador to Britain and the National People's Congress Foreign Affairs committee to robustly demand it be shelved.

But Richard Ottaway, chairman of the British parliament's Foreign Affairs Committee, said on Tuesday that members of parliament would not heed the Chinese calls.

"We are not stopping the inquiry. We met yesterday afternoon and decided to continue," Ottaway told Reuters.

Britain's relations with China took a nosedive in 2012 after Prime Minister David Cameron met the Dalai Lama, the Tibetan spiritual leader whom Beijing says is a separatist.

Ties have mostly recovered since. Cameron visited China last year and Chinese Premier Li Keqiang flew into Britain in June on a trip that sealed billions of dollars of trade deals and advanced London's push to become an offshore yuan trading hub.

Ottaway's inquiry is meant to examine how China and Britain's joint declaration on the transfer of sovereignty over Hong Kong to China is being implemented.

The city was never fully democratic during 150 years of British colonial rule and China says its reforms amount to a "historic milestone" that will allow "one person one vote" when it comes to the Hong Kong chief executive position.

Activists say, however, that the vetting process will make it almost impossible for opposition democrats to get on the ballot.

"My job is to see if Britain is living up to its side of the undertakings and secondly if China isn't living up to their undertakings then what is the British government doing about it," said Ottaway. "This is not interfering in the internal affairs of China; that would be completely inappropriate."


BREACH OF SOVEREIGNTY DEAL?

Separately, Ottaway told BBC TV that China's reforms may flout the 1984 Sino-UK agreement about Hong Kong sovereignty.

"If you have a committee which is not neutral in nominating a limited number of candidates, there seems to be a prima facie case that the undertakings given have been breached," he said.

"I don't particularly want to irritate the Chinese. I want them to understand the way we work."

A spokesman for Cameron said the work of parliament's select committees was "rightly and appropriately entirely independent". He said the government was looking carefully at Sunday's decision by the Chinese authorities.

"Our position hasn't changed ... We think the best way to preserve Hong Kong's strengths is through a transition to universal suffrage which meets the aspirations of people in Hong Kong within the parameters of the Basic Law," he said.

China's letter to British lawmakers warned them to "act with caution on the issue of Hong Kong, bear in mind the larger picture of China-UK relations and Hong Kong's prosperity and stability, (and) stop interfering in Hong Kong's affairs," according to the BBC.

When asked about the matter, a spokesman for China's Foreign Ministry made it clear on Tuesday that Beijing was unhappy about the British inquiry.

"Hong Kong is a special administrative region of China. On the matter of political reform, it is an internal affair of the Hong Kong special administrative region, it is China's internal affair. (We) will not allow foreign forces to intervene," the spokesman told a daily news briefing.

The Chinese Embassy in Britain could not be immediately reached for comment.


(Additional reporting by Sui-Lee Wee; Editing by Mark Heinrich)