'The clear economic benefits of foreign investment in the United States must be weighed against the potential security concerns related to infrastructure components coming under the control of foreign entities,' the panel said, emphasising emerging risks rather than present danger.

The 103-page report outlines scenarios by which the Chinese government could collect massive amounts of sensitive information or launch crippling cyberattacks through state-supported companies' access to global networks.

Infrastructure and products such as long-haul fibres, security software, and smartphones are particularly susceptible to tampering, the panel notes, and Chinese state-supported companies have made significant investments in each of these areas.

US officials have long voiced concerns about China's involvement in information technology. Where Chinese companies have tried to make inroads into the US market, the ground is littered with scuppered deals.

In 2002, Hutchison Whampoa backed out of taking part in a bid to acquire a majority stake in Global Crossing, a company with strategically important holdings in high-traffic undersea cables.

The Committee on Foreign Investment in the US objected. Officials were concerned that stakeholders with Chinese government ties would use their influence to gain access to controlled technology.

'The fear that the Chinese government, if given the opportunity, would extend the use of this technology to collect communications is not an unreasonable fear,' said James Lewis, a research fellow with the Washington-based Centre for Strategic and International Studies.

Similarly, Huawei's impressive advance in the global market has been marred by setbacks in the US due to security sensitivities. US officials blocked the company's 2007 bid to buy telecoms company 3Com, and its proposal last year to supply wireless network equipment to Sprint Nextel also fell victim to security fears.

Huawei's founder Ren Zhengfei is a former People's Liberation Army officer, and the company has ties to the military. A company spokesman said it took security very seriously.

For US companies, outsourcing manufacturing to China had other security risks, the panel said. Deliberately compromised hardware could find its way to sensitive government offices - and already has, according to a cybersecurity expert quoted in the report. Or counterfeit components could wreak unintentional havoc on a vulnerable system.

The panel recommended that government buyers monitor the extent of Chinese involvement in the telecoms industry, and take appropriate precautions.

'By locking in a technologically exclusionary policy too soon, the United States may irrevocably harm its own global competitiveness,' said the commission. 'However, delaying decision-making long enough to better understand the potential risks involved may result in limited options and lost opportunities, or in the worst cases, irrevocable harm if catastrophic consequences occur.'

Some of the panel's concerns are commercial, rather than security-related. China may be outpacing the US in innovation, the report said, which could result in a dramatic shift of market share.

Aside from the security concerns, the US preoccupation with Chinese involvement in the hi-tech sector can be seen in the context of a heightening 'technology war', said Yukon Huang, senior associate at the Carnegie Endowment for International Peace in Washington, as China's hope of becoming a producer of hi-tech innovation comes into conflict with US interests.

'Corporate sectors on both sides have a strong interest in how this is resolved,' Huang said.