Germany, as one of Washington's allies, took the note of warning from the United States government, however, believes that there is nothing to indicate that the Chinese government can use Huawei in espionage and economic sabotage.
Huawei has repeatedly denied it is an agent of the Chinese government.
The US Embassy in Berlin said on Monday that use of untrusted vendors by allies in their 5G mobile networks could jeopardize future sharing of intelligence by the US government.
The Wall Street Journal reported that US Ambassador Richard Grenell sent a letter to German Economy Minister Peter Altmaier on Friday warning that in such a case the US could scale down intelligence and other information exchanges.
Huawei has launched a more aggressive strategy in recent months to counter what it sees as an American "smear" campaign. Hence, the Chinese tech company is credible to bid for the country's 5G project.
Michael Grosse-Broemer, a conservative leader in parliament, said Germany was competent to address its own security, adding, "There is no need for pointers from the US ambassador".
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USA officials have grown increasingly exasperated about what they see as Germany's naivety about potential Chinese security threats.
Merkel told reporters the German government was keenly focused on security of digital networks, including the 5G mobile infrastructure, but Berlin would keep its own counsel. Italy and Japan are reportedly considering the same move.
However, Germany's Federal Network Agency published tougher security guidelines for telecom providers, which require suppliers of 5G networks to be "trustworthy". According to a German interior ministry official familiar of the matter, the full list of conditions would be published six to eight weeks from now.
Some measures in the works include adding a non-spying clause, a requirement to publish code sources used in the infrastructures as well as allowing independent laboratories to carry out tests on the components used.
The State Department has not commented on Grenell's letter, but Garrett Marquis, a National Security Council spokesperson, outlined how Huawei's 5G networks could pose a constantly evolving and shifting threat.