(Updates with U.S. blocking trade with Myanmar ministries, army conglomerates)
* End 'vicious crackdown' on peaceful protests -U.N. rights chief
* U.N. Security Council to discuss situation on Friday -diplomats
* EU suspends support for Myanmar development projects
* U.S. blocks transfer of $1 bln from NY Fed to Myanmar -sources
March 4 (Reuters) - Police broke up demonstrations with tear gas and gunfire in several cities across Myanmar on Thursday, as protesters returned to the streets undeterred by the bloodiest day yet in a crackdown on opponents of last month's military coup.
The United Nations said 38 people had been killed during Wednesday's demonstrations, far more in a single day than the 23 believed to have been killed up until March 1.
U.N. human rights chief Michelle Bachelet demanded the security forces halt what she called their "vicious crackdown on peaceful protesters." Bachelet said more than 1,700 people had been arrested, including 29 journalists.
The U.N. human rights investigator on Myanmar, Thomas Andrews, urged the Security Council - which meets to discuss the situation on Friday - to impose a global arms embargo and targeted economic sanctions on the ruling junta.
States should impose sanctions on the Myanmar Oil and Gas Enterprise, now controlled by the military and its largest source of revenue, he said in a report.
Sources told Reuters that Myanmar's military rulers attempted to move about $1 billion held at the Federal Reserve Bank of New York days after seizing power on Feb. 1. U.S. officials froze those funds indefinitely, according to three people familiar with the matter, including one U.S. government official.
Separately, the U.S. Commerce Department on Thursday designated trading curbs on Myanmar's Ministry of Defence, Ministry of Home Affairs and military conglomerates MEC and MEHL, effective on March 8, according to a federal registry filing.
U.S. State Department spokesman Ned Price had said that Washington would take further action in response to the rising violence in the aftermath of the coup, which overthrew elected leader Aung San Suu Kyi.
In Myanmar, activists said they refused to accept military rule and new elections promised by the junta, voicing determination to press for the release of the detained Suu Kyi, 75, and recognition of her Nov. 8 election victory.
"We know that we can always get shot and killed with live bullets but there is no meaning to staying alive under the junta," activist Maung Saungkha told Reuters.
Police opened fire and used tear gas to break up protests in Yangon and the central town of Monywa, witnesses said. Police also opened fire in the town of Pathein, west of Yangon, and used tear gas in Taunggyi in the east, media reported.
Big crowds gathered peacefully for rallies elsewhere, including the second city of Mandalay and in the historic temple town of Bagan, where hundreds marched carrying pictures of Suu Kyi and a banner saying: "Free our leader", witnesses said.
A spokesman for the ruling military council did not answer telephone calls seeking comment.
'EVERYTHING WILL BE OK' PROTESTER MOURNED
Hundreds of people attended the funeral of a 19-year-old woman shot dead in Mandalay on Wednesday, who was photographed wearing a T-shirt that read "Everything will be OK". After her death, the slogan went viral as a symbol of defiance. .
On Wednesday, police and soldiers had opened fire with live rounds with little warning in several cities and towns, witnesses said.
"Myanmar's security forces now seem intent on breaking the back of the anti-coup movement through wanton violence and sheer brutality," said Richard Weir, a Human Rights Watch researcher.
Suu Kyi's National League for Democracy (NLD) party said in a statement that flags would fly at half staff at its offices to commemorate the dead. The NLD won the election in a landslide and while the military made allegations of fraud, the election commission said the vote was fair.
The European Union suspended support for development projects to avoid providing financial assistance to the military, officials said on Thursday. The support in past years has involved more than 200 million euros ($241 million) in separate programmes.
Myanmar's generals have long shrugged off outside pressure.
The U.N. special envoy for Myanmar, Christine Schraner Burgener, said on Wednesday she had warned deputy military chief Soe Win that the army was likely to face strong measures from some countries over the coup.
"The answer was: 'We are used to sanctions, and we survived'," she told reporters in New York. "When I also warned they will go (into) isolation, the answer was: 'We have to learn to walk with only few friends'."
The United States has told China, which has declined to condemn the coup, that it expects it to play a constructive role. China has said stability is a top priority in its strategic neighbour.
At least 19 Myanmar police officers have crossed over into India, fearing persecution for disobeying orders, a senior Indian police official told Reuters.
A clash over who represents Myanmar at the United Nations in New York was averted - for now - after the junta's replacement quit and the Myanmar U.N. mission confirmed that Ambassador Kyaw Moe Tun remained in the job.
(Reporting by Reuters Staff; Writing by Ed Davies, Robert Birsel and Grant McCool; Editing by Stephen Coates, Angus MacSwan and Rosalba O'Brien)