By Liana B. Baker

(Reuters) - U.S. President Donald Trump blocked a Chinese-backed private equity firm from buying a U.S.-based chipmaker on Wednesday, sending a clear signal to Beijing that Washington will oppose takeover deals that involve technologies with potential military applications.

Canyon Bridge Capital Partners' planned $1.3 billion acquisition of Lattice Semiconductor Corp was one of the largest attempted by a Chinese-backed firm in the U.S. microchip sector and was the first announced deal for the buyout fund, which launched last year with a focus on technology investment. U.S. regulatory scrutiny grew after Reuters reported in November that Canyon Bridge was funded partly by capital from China's central government and had indirect links to its space program.

U.S. defense officials subsequently raised concerns about the Lattice acquisition by a firm backed by the Chinese government.

Portland, Oregon-based Lattice makes chips known as field-programmable gate arrays, which allow companies to put their own software on silicon chips for different uses. It said it no longer sells chips to the U.S. military, unlike its two biggest rivals, Xilinx Inc and Intel Corp's Altera. Trump said in an executive order that Lattice and Canyon Bridge "shall take all steps necessary to fully and permanently abandon the proposed transaction" within 30 days.

Trump's decision chimes with the views of the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes deals for potential national security threats.

U.S. Treasury Secretary Steven Mnuchin said in a statement following the decision that "CFIUS and the president assess that the transaction poses a risk to the national security of the United States that cannot be resolved through mitigation."

Mnuchin added that the national security risk was related to the transfer of intellectual property, the Chinese government's role in supporting the deal, the importance of semiconductor supply chain integrity to the U.S. government and the U.S. government's use of Lattice products.

China expressed concern about the decision.

"We believe conducting security examinations of investments in sensitive sectors is a country's legitimate right, but it should not become a tool for advancing protectionism," Chinese Commerce Ministry spokesman Gao Feng told a press briefing on Thursday.

Gao said he hoped the United States could view Chinese firms' acquisitions objectively and provide fair treatment to what was their "normal commercial behavior".

Lattice and Canyon Bridge said in a joint statement late on Wednesday they had terminated the proposed deal. Lattice also said it is committed to achieving profitable growth.

Canyon Bridge had said in an earlier statement that it was disappointed in the decision, and called the proposed transaction "an excellent deal for Lattice's shareholders and its employees."

SENSITIVE MOMENT

The announcement comes at a sensitive time for U.S.-China relations, which are already strained over trade issues and North Korea. The Chinese Communist Party is also preparing to hold its once-every-five-years Congress in October.

Trump’s decision ends a prolonged campaign by Canyon Bridge and Lattice to seal the deal. Canyon Bridge and Lattice had spent more than eight months trying in vain to persuade CFIUS to clear the acquisition.

Both companies had said the deal did not pose any security risks and Canyon Bridge told CFIUS it would double the number of Lattice's employees in a bid to make the deal more palatable, according to people familiar with the matter who declined to be identified because details of the regulatory process are confidential.

The companies' decision to appeal directly to Trump was a last-ditch gamble. It was the first such deal to hit Trump's desk and only the fourth time in three decades that an acquisition was put in front of a president after CFIUS recommended against it.

Trump has hewed to the presidential tradition of following the advice of national security officials on deals.

The U.S. refusal potentially hurts Canyon Bridge's ability to acquire other Western semiconductor companies. Most of its acquisition targets have U.S. operations, making them subject to a CFIUS review.

Palo Alto, California-based Canyon Bridge has been working on a bid for British semiconductor company Imagination Technology Group, sources have previously said. If Canyon Bridge clinches that deal, it would also be subject to CFIUS review since Imagination Technologies acquired U.S. chip designer MIPS in 2013.

While Canyon Bridge could choose to divest MIPS, which accounts for a small fraction of Imagination Technologies' business, there is no certainty that would be enough to resolve all CFIUS issues, according to the sources.

Imagination Technologies declined to comment.

Investors have been skeptical the Lattice deal would get passed since it was announced last November. Lattice shares have been trading below the deal's $8.30 offer price and were down 1.6 percent in after-hours trading on Wednesday.

Chinese deals awaiting approval include Ant Financial's $1.2 billion purchase of U.S. money transfer company MoneyGram International Inc and China Oceanwide Holdings Group Co Ltd's [OWREAC.UL] $2.7 billion acquisition of U.S. insurer Genworth Financial Inc.

Unic Capital Management's $580 million acquisition of U.S. semiconductor testing company Xcerra Corp is also awaiting approval, while HNA needs to get CFIUS clearance to buy hedge fund SkyBridge Capital LLC from Anthony Scaramucci, the Trump administration's former communications director.

HNA, the Chinese airline-to-financials group, also needs CFIUS approval for its purchase of a 25 percent stake in Old Mutual's U.S. fund management arm. A person close to HNA said the two deals are "on track".

Ant Financial, which resubmitted the deal for U.S. review in mid-July, is still actively engaged with CFIUS, a person familiar with the matter said.

"We are not commenting on the CFIUS process, but we are continuing to work with the various regulatory agencies and remain focused on closing the transaction by the end of the year," Ant Financial said in a statement.

HNA did not immediately respond to Reuters' requests for comment.

(Reporting by Liana B. Baker in New York, Additional reporting by Diane Bartz in Washington, Elias Glenn in Beijing and Kane Wu in Hong Kong; Editing by Muralikumar Anantharaman and Stephen Coates)