The US could block plans by the British government to privatise the Ministry of Defence's equipment repair and maintenance arm because of fears over the security of shared military technology, according to secret MoD papers seen by the Observer.

The documents also state that the British army is "understandably nervous" about the sale to a private company of the Defence Support Group (DSG), a team of 2,800 top-grade engineers who service military equipment including aircraft, armoured vehicles and tanks both at home and in theatres such as Afghanistan.

Ministers announced plans to sell off the DSG in the 2010 Strategic Defence and Security Review as part of plans to slash the MoD budget, raising hundreds of millions of pounds. A formal invitation to tender is due in a few days.

But the documents, marked "restricted – commercial", spell out fears in Washington and the British army about the potential loss of intellectual property if and when top-secret information about equipment is taken out of MoD control and handed to a private company.

The UK and US have in recent years increasingly shared military and battlefield communications technology – including location systems, so as to prevent friendly-fire deaths. However, the Pentagon and some members of Congress have long been nervous about the implications of technology-sharing agreements, even with America's closest allies. In the past these were governed by tough export control licences, which led to long delays.

The process was made easier by the US-UK Defence Trade Co-operation Treaty, signed with George W Bush in 2007, in the last days of the Tony Blair administration. Coming into force last year, and driven by the need to share counter-terrorism technology more quickly during US-UK military co-operation in Iraq, this deal allowed much quicker technology transfers without the need for an export licence.

In exchange, the UK is required by treaty to ensure that US technology is both covered by the Official Secrets Act and physically secure.

It is the risk to this agreement that is at the heart of the problem. Indeed, US opponents of the treaty at the time pointed to the case of a US defence contractor that illegally transferred classified night-vision technology to China, Singapore – and Britain.

Tory and Labour MPs, as well as trade unions which fear job losses and closure of maintenance and repair bases, have already voiced opposition to the sale.

But the documents show that worries extend to the heart of the US and British military authorities. Top-level talks have taken place between US and UK officials. The papers state that "the sale of DSG gives rise to significant IP [intellectual property] issues".

A page marked "Risks" that lists measures taken to mitigate them states: "IPR issues are a potential showstopper if the department does not judge that a buyer would have sufficient rights to deliver the requirement. Risk if sale goes ahead on basis of incomplete information, post-sale IP owners could refuse access to the IP, meaning DSG services couldn't be delivered and unavailability of equipment."

The same page suggests the US would veto the handing of highly sensitive technical information to a private company if it was worried that agreements did not conform with legal requirements under the International Trade in Arms regulations (Itar), designed to protect national security.

The risk assessment states: "US government will be unwilling to agree to the transfer of activity on Itar-related technology to be transferred from MoD to the private sector … if work to agree such transfer is unsuccessful."

It is understood any contract given to a private company would involve around £1.4bn of work over 10 years.

The papers acknowledge concerns that a sale, if not handled well, might not save money and might lead to legal problems that could cause crucial equipment to be unavailable.

They also cite concerns over job losses and the security of supply of equipmentto the military. "Specific areas of concern are likely to include job security, site closures and guarantee of supply to the armed forces," it said.

The DSG's air business will be excluded from the sale, the documents state, because "the market has little appetite to acquire it". They say that even if no "strategic decision" had been made to sell DSG that "there would be a compelling case for change". The DSG's "throughput is set to reduce as operations in Afghanistan cease and the army retires some of its legacy platforms from service. If DSG is to remain viable, it must find new sources of work from MOD and other customers."

An MoD source said the sale of DSG would benefit taxpayers when completed in late 2014. "This will allow us to better concentrate resources on the frontline, rather than the behind-the-scenes supporting functions such as vehicle repairs and maintenance."