Huawei Technologies and ZTE face the prospect of getting kicked out of the world's biggest telecommunications equipment market.
An 11-month congressional investigation in the United States found that the two Chinese companies posed a strong threat to national security.
The bipartisan Intelligence Committee of the House of Representatives released a 52-page report yesterday recommending that both firms be barred from acquiring US assets and from supplying any equipment to telecommunications network projects there, especially those funded by the government, for fear of possible spying and cyberattacks by China.
The report claimed the two firms failed to fully co-operate with the panel to alleviate its security concerns.
Committee chairman Mike Rogers said at a news conference to release the report that the panel was stopping short of urging a US boycott of mobile phones and other handheld devices made by Huawei and ZTE. Its warning related only to devices that involve processing of data on a large scale, he said
Huawei and ZTE rejected the probe's findings.
A Foreign Ministry spokesman in Beijing, meanwhile, called on the US Congress to "set aside prejudices, respect the facts, and do things that will benefit China-US economic co-operation".
In separate interviews with the South China Morning Post, spokesmen from Huawei and ZTE maintained that their respective firms gave their utmost co-operation to the US probe and that their products were safe.
"Huawei is a globally trusted and respected company doing business in almost 150 markets with over 500 operator-customers," Huawei vice-president Scott Sykes said. "The security and integrity of our products are world-proven."
Headquartered in Shenzhen, privately held Huawei is China's biggest manufacturer of telecommunications equipment and the industry's second-largest supplier worldwide.
David Dai Shu, a spokesman for Hong Kong-listed ZTE, said the company's equipment was "evaluated by an independent US threat-assessment laboratory, with oversight by US government agencies".
ZTE said it wanted that process, which it described as a "trusted delivery model", to be widely adopted in its industry, since most, if not all, telecommunications equipment was made in China.
The share price of the company, which is also based in Shenzhen, shed 5.97 per cent to close at HK$12.60 yesterday on news of the unfavourable result of the US investigation.
But there was more bad news for ZTE yesterday. Networking giant Cisco Systems has ended a long-standing sales partnership with ZTE after an internal investigation into claims the Chinese company sold Cisco networking gear to Iran, a Reuters report said.
News broke in July that both the US Federal Bureau of Investigation and Commerce Department had initiated investigations into ZTE over its American subsidiary's alleged sale to Iran of banned technologies, which were built into a surveillance system worth US$130.6 million.