Huawei's equipment may pose a threat to national security, senior British security officials have warned.
Intelligence experts say they can give only limited assurances that the Chinese firm is not a risk to broadband and phone networks.
The recommendation will be made in a soon to be published annual report signed off by the GCHQ spy agency, according to inside sources.
Huawei is a major supplier of broadband and mobile network equipment in Britain and the the world's biggest producer of telecoms equipment.
The finding will likely intensify the espionage debate around the company, which has come under increasing fire in the US and Australia.
One US official has claimed Huawei is effectively an arm of the Chinese government, and is more than capable of stealing information by hacking its devices.
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Chinese firm Huawei's UK operations may pose a threat to national security, senior British security officials have warned. Intelligence experts say they can give only limited assurances that the firm is not a risk, downgrading their previous position, according to inside sources
'Identification of shortcomings in Huawei's engineering processes have exposed new risks in the UK telecommunication networks and long-term challenges in mitigation and management,' senior British security officials said in the report.
Huawei, the world's biggest producer of telecoms equipment, said that it welcomed the thrust of the report by the Huawei Cyber Security Evaluation Centre (HCSEC) oversight board.
The Shenzhen based firm said it showed supervision by British authorities was working well.
'The report concludes that HCSEC's operational independence is both robust and effective,' a Huawei spokesman said.
'The Oversight Board has identified some areas for improvement in our engineering processes.
'We are grateful for this feedback and are committed to addressing these issues.
'Cyber security remains Huawei's top priority, and we will continue to actively improve our engineering processes and risk management systems.'
Huawei says no inspection has ever found any backdoor vulnerabilities in its equipment.
It says it is a private company not under Chinese government control and not subject to Chinese security laws overseas.
The firm is a major supplier of broadband gear and mobile networks in Britain, meaning its products are used in critical national infrastructure which could be targeted by foreign adversaries.
Britain's National Cyber Security Centre, which is part of Government Communications Headquarters (GCHQ) that provides the signals intelligence, had no immediate comment.
HCSEC was set up by Huawei in 2010 in response to British government concerns about possible security threats to national infrastructure. British security officials, including from GCHQ, sit on its oversight board.
The assessment, in a soon to be published annual report signed off by the Government Communications Headquarters (GCHQ) spy agency, will intensify the espionage debate around the company. This image shows its headquarters in Cheltenham, Gloucestershire
London says it effectively addresses security issues by having all Huawei products reviewed by staff at a special company laboratory overseen by British government and intelligence officials.
But for the first time, the upcoming report by the HCSEC oversight board has reduced the level of security assurance provided by HCSEC.
'Whereas in previous reports there was a conclusion that HCSEC could give assurance that risks have been mitigated, this time they will say limited assurance,' said one source.
'This is a big change, though understated,' the person said.
All sources contacted for this report declined to be named because the government documents have not yet been published.
All three previous oversight board reports concluded that HCSEC provided 'assurance that any risks to UK national security from Huawei's involvement in the UK's critical networks have been sufficiently mitigated.'
It is not exactly clear why that