The German economy ministry has recommended that the sale of a chip factory to a Chinese-owned firm should be blocked as it poses a security threat, government sources said Tuesday.
Sweden's Silex, a unit of Chinese company Sai MicroElectronics, had been seeking to take over Dortmund-based Elmos.
"The ministry has therefore suggested that the federal cabinet prohibits the acquisition of Elmos," they said.
The ministry is headed by Robert Habeck from the Greens, one of three parties in Germany's ruling coalition.
The cabinet still needs to give final approval to block the deal.
The move came after intelligence agencies reportedly raised concerns that Chinese control of key production capacity could allow Beijing to apply pressure on Germany.
The micro-chip industry is particularly sensitive. German car giants last year saw production heavily disrupted due to chip shortages caused by supply chain problems.
Elmos, which primarily builds components for the automobile industry, said late last year it intended to sell the production facility at its headquarters.
Silex is seeking to buy the site for 85 million euros (dollars), which would allow Elmos to shed its own production activities and begin to sell Silex chips to its manufacturing clients.
Business daily Handelsblatt had earlier reported that Berlin originally intended to approve the deal, as the company's technology was not state of the art, but the domestic security watchdog raised concerns.
German industry's heavy reliance on China is under fresh scrutiny after Berlin was left badly burned when Russia slashed crucial gas supplies following its invasion of Ukraine.
On a controversial visit to Beijing last week, Chancellor Olaf Scholz told Chinese leaders that Berlin expected equal treatment on trade.
Ahead of the trip, a row erupted over whether to allow Chinese shipping firm Cosco to buy a stake in a Hamburg port terminal.
Scholz resisted calls to block the deal, instead permitting the company to acquire a reduced stake.