Huawei Technologies Co HWT.UL and ZTE Corp 000063.SZ (0763.HK), the world's second- and fifth-biggest makers of telecom equipment respectively, have been gaining market share from European rivals such as Ericsson (ERICb.ST) and Alcatel Lucent SA (ALUA.PA) because of aggressive pricing.

In May, EU diplomats said the trade bloc would like to take action against Huawei and ZTE on the grounds that they receive illegal state subsidies that allow them to sell equipment at lower prices.

"We think such accusations are groundless and unreasonable," Shen Danyang, a spokesman for China's commerce ministry, told a news conference on Tuesday.

"Huawei and ZTE operate under a completely free market environment. Their products gain global competitiveness via the companies' active R&D efforts," Shen said.

The denial from the commerce ministry comes days after a Huawei board member told Reuters that the subsidies given to the Shenzhen-based company were legal and that the government didn't help it gain business globally.

The spat could potentially dent EU trade with China, with bilateral commerce expected to reach a record 500 billion euros ($620 billion) this year.

China is the EU's second-largest trading partner after the United States. The bloc is China's biggest.

(Reporting by Langi Chiang and Ken Wills; Writing by Lee Chyen Yee; Editing by Ryan Woo)

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