A draft of a report by the House Intelligence Committee said Huawei and another Chinese telecom, ZTE, "cannot be trusted" to be free of influence from Beijing and could be used to undermine US security.
"Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems," the draft document said.
Huawei was the subject of an intense political debate in Australia this year after it was barred, on security grounds, from participating in the national broadband network.
In March, it was revealed that the Gillard government had banned Huawei from any involvement in the $36 billion NBN.
The decision, based on advice from the intelligence agency ASIO, sparked claims by the opposition that the government was jeopardising vital Chinese investment.
Last month, the former Victorian premier John Brumby, a director of Huawei Australia, said he was hopeful the company could participate in the broadband network, as this would convince other governments it was not a security risk.
A spokesman for Huawei Australia told Fairfax Media yesterday that the company had not become the world's No.1 telecommunications equipment provider without its partners trusting its technology and staff.
"Huawei works with 45 of the world's top 50 operators and all major Australian operators, and our technology is second to none. Those are the facts today and those will still be the facts next week, political agendas aside," he said.
The US congressional panel launched its investigation over concerns that Beijing could use the fast-growing firms for economic or military espionage, or cyber attacks.
Both Huawei and ZTE have denied any ties with the Chinese government. Top executives of the firms appeared at a hearing held by the panel last month, stressing that they were focused on business, not politics.
Huawei reiterated that position today. "The integrity and independence of Huawei's organisation and business practices are trusted and respected across almost 150 markets," Huawei vice-president William Plummer said.
"Purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignores technical and commercial realities, recklessly threatens American jobs and innovation, does nothing to protect national security, and should be exposed as dangerous political distractions."
ZTE did not immediately respond to requests for comment.
The committee said both companies failed to provide adequate answers to lawmakers' questions about their relationship with the Chinese government.
"China has the means, opportunity and motive to use telecommunications companies for malicious purposes," said the report, due to be published on the committee's website.
Based on its investigation, the panel said US authorities "must block acquisitions, takeovers or mergers involving Huawei and ZTE given the threat to US national security interests."
The panel said the US should even consider extending the authority of a super-secret panel that reviews foreign acquisitions to include purchasing agreements.
US government systems, particularly sensitive ones, should not include Huawei or ZTE equipment – not even component parts – nor should those of government contractors working on sensitive US programs, it said.
The report also said US private-sector entities "are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services."
Because of the lack of clear information on how the companies operate, the committee report said they could be used for "malicious Chinese hardware or software implants" that could serve as "a potent espionage tool for penetrating sensitive US national security systems, as well as providing access to the closed American corporate networks."
The 59-page draft report cited a host of other potential issues with the two firms, including unfair subsidies, allegations of bribery or corruption, dealings with Iran and ties with China's military and Communist Party.
In addition to the concerns cited by the lawmakers, the report said an unpublished, classified annexe includes even more.
"The classified annexe provides significantly more information adding to the committee's concerns," it said. "That information cannot be shared publicly without risking US national security."