Meanwhile, the European Commission has delayed a trade case against Huawei and another Chinese telecom equipment maker, ZTE Corp, easing tensions between the European Union and China, its second-biggest trading partner.

Canada has invoked a national security exception to let it discriminate, without violating international trade obligations, against companies deemed as too risky to be involved in putting together the network for carrying government phone calls, emails and data center services, Canadian Prime Minister Stephen Harper's spokesman told a news conference.

"The government's going to be choosing carefully in the construction of this network, and it has invoked the national security exception for the building of this network," Andrew MacDougall, spokesman for the Conservative prime minister, said.

"I'll leave it to you if you think ... Huawei should be a part of a Canadian government security system," MacDougall said.

MacDougall was speaking in reaction to a report on Monday from the U.S. House of Representatives Intelligence Committee, which urged American firms to stop doing business with Huawei and ZTE.

It warned that China could use equipment made by the two companies to spy on certain communications and threaten vital systems through computerized links.

CBC television reported that the House committee chairman, Representative Mike Rogers, is also urging Canadian companies not to do business with Huawei.

Huawei and ZTE are the world's second- and fifth-largest makers of wireless telecoms gear.

EU Trade Commissioner Karel De Gucht is gathering evidence in order to launch an anti-dumping or anti-subsidy case. 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.

'PROCUREMENT OPPORTUNITIES'

Huawei has a thriving business in Canada. It won a contract in 2008 to build telecommunications networks for domestic operators Telus Corp and BCE Inc's Bell Canada, and it has even received a C$6.5 million ($6.6 million) grant from the province of Ontario towards a C$67 million investment by Huawei in research and development.

"The national security exception only applies to foreign companies," said Huawei Technologies Canada Co Ltd spokesman Scott Bradley.

"Huawei is fully incorporated in Canada, and operates as a subsidiary Canadian company. This alone effectively enables us to bid on any potential procurement opportunities," Bradley added.

Huawei has 130 engineers in its Ottawa research-and-development facility and has 300 employees in its Canadian head office in Markham, Ontario, the company said. The company says it has so far procured C$400 million from Canadian companies.

Its services may be in particular demand by Canadian firms next year after an auction of valuable wireless spectrum of 700 MHz frequencies, compatible with the new mobile broadband technology known as long-term evolution (LTE), one of Huawei's fortes.

In invoking the security exception for the government network, Canada has not gone as far as Australia, which has barred Huawei from taking part in contracts to build the government's $38 billion national broadband network.

Bradley suggested the Australian decision was made for other reasons.

Bradley said that Australia has made pretty clear that it is "trying to cozy up to the United States right now in terms of their trade relationship," noting that Australia has also agreed to have 2,500 U.S. troops stationed there.

David Skillicorn, Internet security expert at Queen's University in Kingston, Ontario, said he supports the U.S. recommendation not to deal with Huawei and said the Canadian government should revisit its decision to let it operate in Canada.

"The Harper government is putting Canadian telecommunications companies at risk. We shouldn't be rolling out the red carpet for this company," Skillicorn said.

The negative publicity in Canada for Huawei and for China in general may have ramifications for a $15.1 billion bid by China's CNOOC Ltd for Canadian oil firm Nexen Inc.

The Canadian government must decide if the takeover would be of net benefit to Canada. Some politicians have said a Chinese state-owned firm should not be allowed to scoop up a Canadian oil firm.

Canada's spy agency Canadian Security and Intelligence Service has put out a report saying investment in strategic sectors by some foreign state-owned firms could threaten national security.

($1=$0.98 Canadian)

(Additional reporting by Philip Blenkinsop in Brussels; Editing by Peter Galloway and Will Dunham)

(This story corrects the amount of the Ontario grant, in the 11th paragraph, to C$6.5 million from C$67 million)

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