A U.S. congressional report said on Monday that Huawei Technologies Co Ltd and ZTE Corp -- the world's second- and fifth-largest makers of wireless telecoms gear -- were potential security risks and should be shut out of the U.S. market.

In Europe, where the two have had greater success in selling equipment and the concern is over prices rather than security, they can expect some respite -- probably until the middle of next year, EU diplomats and trade experts say.

EU Trade Commissioner Karel De Gucht is gathering evidence in order to launch an anti-dumping or anti-subsidy case, but his efforts have been hindered by the fact that no European producer, such as Ericsson and Alcatel-Lucent, has complained. A formal complaint is normally a prerequisite for an investigation.

Analysts say European telecoms gear makers would be reluctant to cut themselves off from China, where demand for telecoms equipment is growing.

Nokia Siemens Networks and Alcatel-Lucent, globally No. 3 and No. 4 telecoms gear makers, have shown no willingness to do so, while market leader Ericsson has even said it does not want a case to be brought.

TRADE TENSION

China is the European Union's second-biggest trading partner after the United States, and the bloc is China's biggest trade partner. Trade between the two is forecast to hit a record 500 billion euros ($397 billion) this year.

Despite this, relations have been tense, with De Gucht complaining China subsidizes "nearly everything", distorting competition.

The EU suspects that the Chinese producers are hurting European telecoms equipment suppliers through artificially low prices, which are at least in part funded by the massive credit lines from the Chinese government.

A Reuters eyewitness has seen an offer from a Chinese gear maker to replace the whole network of a European carrier for nothing.

De Gucht said in May the Commission was considering launching a case on its own initiative, without the need for an industry complaint. It last took this approach in a case against India in 1997.

Trade experts say such cases are awkward because the Commission appears to be both complainant and judge and still needs co-operation from EU producers and EU member states, which ultimately vote on Commission proposals to impose duties.

"It's clear a number of member states are not in favor of this," an EU trade expert said.

The Commission also wishes to hold fire after starting an investigation last month into suspected dumping of solar panels by Chinese producers, the largest sector ever targeted.

The move, albeit following a complaint by European companies, drew a warning from China.

Trade experts and diplomats believe the Commission is awaiting Beijing's response before launching a telecoms case and hopes the solar panel case impresses upon China how serious it is about tackling dumping and subsidies.

Without action by June, the EU would impose duties on Chinese solar panels and probably launch its own action against Huawei and ZTE, trade experts say.

(Additional reporting by Tarmo Virki in Helsinki, Ethan Bilby, Robin Emmott in Brussels; Editing by Louise Heavens)

• A Permanent Economic Emergency