The Vatican is excommunicating two bishops who were illegally ordained by China's breakaway Catholic Church.
Pope Benedict XVI expressed his "deep displeasure" over the appointments.
The rift comes as Beijing and the Vatican are engaged in talks with the aim of re-establishing relations, which were severed more than 50 years ago.
Excommunication is automatic under Church law for bishops who are illegally ordained, says the BBC's David Willey in Rome.
The Vatican also said it had received information that bishops had come under "strong pressure and threats" to take part in the ordinations.
If that was proved, the excommunications could be suspended, our correspondent says.
There are an estimated 10 million Catholics in China, divided between the officially tolerated Patriotic Church, and an underground church loyal to Rome.
The Chinese Church does not recognise the Vatican's power to appoint bishops, causing tensions between the two sides.
'Threats'
On Wednesday, Liu Xinhong was consecrated at a church in Anhui province in eastern China, while on Sunday the state church ordained Ma Yinglin as a bishop in the south-western province of Yunnan.
A statement released by the Vatican said the ordinations represented a "grave violation of religious freedom... a grave wound to the unity of the Church" and warned of "severe canonical sanctions".
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The statement was unusually strong in tone, says our correspondent, and makes it clear that the Vatican, while open to what it calls "honest and constructive dialogue", will not tolerate unilateral acts by the Chinese Church.
Asked to comment on the statement, China's foreign ministry told Reuters news agency:
"The Vatican's condemnation makes no sense. We hold a sincere attitude towards improving Sino-Vatican relations and have made active efforts. We hope the Vatican side can support a good environment for improvement of the relationship."
Third ordination
China is planning to ordain an auxiliary bishop later this month, a senior official of the state-sanctioned church told the AFP news agency.
Pei Junmin would be ordained later this month as auxiliary bishop of the diocese in the north-east province of Liaoning, said Liu Bainian, vice-chairman of the Chinese Catholic Patriotic Association.
Secret talks have been taking place in recent months between envoys from both sides.
China has said it would like better relations with the Vatican, but wants the Holy See to cut its diplomatic links with Taiwan first.
Diplomatic ties were severed in 1951 after the 1949 Communist takeover in China and subsequent crackdown on religion.
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