The US House of Representatives' Intelligence Committee has said that Huawei should be shut out of the US market because potential Chinese state influence on them poses a security threat.
The stance taken is the complete opposite of that in the UK where Huawei works with British intelligence agencies.
US panel leaders carried out an 11-month investigation of the pair because of fears that China might be spying on the country.
Huawei and ZTE want to expand in the United States, but now it seems that they will have the US government telling their customers about how they are a possible espionage threat.
According to Reuters, Huawei is considering an IPO as part of a possible effort to overcome suspicions but a spokesperson said that there was no truth to the committee's suggestions.
He said that “baseless suggestions” purporting that Huawei is somehow vulnerable to cyber mischief ignore technical and commercial realities.
ZTE released a copy of the letter it sent to the committee, stating it "profoundly disagrees" with the claim that it is directed or controlled by the Chinese government.
ZTE is listed in Hong Kong and saw its shares fall on the back of the news.
The panel's draft report faulted both companies for failing to satisfy the committee's requests for documents to allay its concerns, including detailed information about formal relationships or regulatory interaction with Chinese authorities.
It says that US companies should find another vendor if they care about intellectual property, consumer privacy, and the national security of the USA. Of course, the United States already has the infamous Patriot Act, which itself has faced criticisms from privacy groups.
CBS News' "60 Minutes", claimed to have received credible allegations from unnamed industry experts and current and former Huawei employees suggesting Huawei, in particular, may be guilty of bribery and corruption, discriminatory behaviour and copyright infringement.
The committee said that it will refer such allegations to the Justice Department and Department of Homeland Security.