A new US government policy that makes it easier to sell items with potential military uses to some companies in China should be suspended because it threatens national security, the Wisconsin Project on Nuclear Arms Control, a watchdog group, has said in a report on Wednesday 2 January.

The programme increases the risk that American goods with military use will be illicitly sold to Syria or Iran, or help China improve its armed forces, says the report. Two of the five companies selected in October for the plan have close ties ''to China's military industrial complex or to companies that have been punished by the US government for proliferation or other improper export behaviour,'' the report adds.

''In view of the failure of the selection process to safeguard US national security, the Commerce Department should suspend the Validated End-User programme pending a Government Accountability Office (GAO) investigation,'' the research group, which opposes the spread of nuclear, chemical and biological weapons, has recommended.

But a representative of the US Commerce Department defended the programme and said it was part of a broader initiative launched in June to impose new export controls on about 20 categories of high-tech goods that could be used by China's rapidly expanding military.

The Commerce Department scheme allows approved companies in China to import certain high-tech goods for civilian uses without obtaining individual export licenses. The new regulation addresses US firms' concerns about being locked out of the fast-growing Chinese market.

Defending the policy as ''a much, much finer sift to effectuate the purposes of our broader foreign policy with respect to China,'' undersecretary of Commerce for industry and security Mario Mancuso said the concerns were not justified.

One of the first five approved companies - Shanghai Hua Hong NEC Electronics Company (HHNEC) - is a distant subsidiary of the Chinese Electronics Corporation (CEC), a Chinese government-owned conglomerate that produces military equipment as well as consumer electronics, the report said. The State Department had punished another CEC subsidiary in 2006 for proliferation ''to Iran and/or Syria'', it said.

The Wisconsin Project claims the programme would allow the CEC to import sensitive US goods and then divert them - either to one of its other subsidiaries that outfits the Chinese army, or to Iran or Syria.

Another approved company - BHA Aerocomposite Parts Co Ltd - is partly owned by China Aviation Industry Corp I (AVIC I), a Chinese government-owned producer of fighters, nuclear-capable bombers, and around 90 per cent of the aviation weapon systems used by the People's Liberation Army (PLA), the report said.

The US government last year fined BHA's co-owners - Boeing and Hexcel - for exporting controlled items to China without authorisation, the report said. Another AVIC I subsidiary, CATIC, is under State Department sanctions for proliferation to Iran and Syria.

A Bush administration panel that included the departments of State, Defence, Energy and Commerce approved the five companies after a rigorous security investigation, Mancuso said.

All five also are subject to ongoing monitoring, including disclosure of all shipments under the VEU program and an obligation to host onsite visits by US government representatives.