The $450m Hughes Electronics satellite was designed to provide a mobile telephone network for much of Asia and was ordered by the Asia Pacific Mobile Telecommunications consortium based in Singapore.

President Clinton approved the sale two-and-a-half years ago, but officials now say that, within the 51% of the consortium that is Chinese-owned, there are organisations with links to the People's Liberation Army.

Bilateral impact

White House spokesman Joe Lockhart confirmed that Washington was blocking the deal on Tuesday after a story appeared in a US newspaper.

But he denied the decision signified a worsening of the US relationship with China, which he said spanned a wide range of issues.

"I don't expect that this decision, based on the best thinking at the State Department and the Defence Department, will have a significant impact on the relationship," Mr Lockhart said.

A spokesman for Hughes said the deal would not have given Beijing any military advantage but Defence Department officials were said to be concerned that technology used for tracking and manoeuvring the satellite could be used to improve missile guidance.

Mr Clinton has been keen to improve ties with China

Analysts in Beijing are reported to believe the decision could affect US-Chinese relations but they do not say how much they will be affected.

The Hughes spokesman said China was not the company's dominant market but he did express concern about the effect on the US satellite industry as a whole.

Washington has long promoted commercial satellite deals with China in an effort to give US companies a foothold in a lucrative market.

Espionage fears

A recent Congressional report concluded that satellite deals with China could be harmful to US security and there have been growing calls in Congress for more rigorous controls on technology exports.

The BBC Washington Correspondent, Richard Lister, says the State Department insists the rejection of this deal does not reflect a change in US policy, but it does signal that such transactions are likely to face greater scrutiny in the future.