The EU told member states it had been gathering evidence for an anti-dumping case against Huawei Technologies Co Ltd and ZTE Corp, saying that they had obtained illegal government subsidies and sold products in the EU below cost, the newspaper said, quoting unidentified EU officials and executives.

Once the EU determined that China was acting illegally, Huawei and ZTE, the world's No.2 and No.5 telecom equipment makers, could be subject to punitive EU tariffs, the FT said.

ZTE declined comment, while Huawei had no immediate comment.

Huawei and ZTE compete globally in the telecom equipment business with European vendors such as Ericsson, Alcatel-Lucent and Siemens-Nokia.

Earlier in May, the EU's Trade Commissioner Karel De Gucht said the EU was planning new trade defenses to counter subsidies and dumping by trading partners, such as China.

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

But the relationship is tense. De Gucht has in the past complained that China subsidies "nearly everything", making it hard to compete.

(Reporting by Lee Chyen Yee; Editing by Richard Pullin)

• A Permanent Economic Emergency