German machine tool manufacturer Leifeld on Wednesday said Chinese investors had dropped their bid to purchase the strategic company to avoid a veto from the German government.

"I can confirm that the interested party has withdraw its request for clearance from the economy ministry," a Leifeld spokeswoman told AFP, confirming media reports.

The move came just hours before the German government was set to announce whether or not it would block the sale, amid growing unease about Chinese firms buying up German know-how and sensitive technology.

A source close the economy ministry told AFP the government was indeed planning to use its veto powers to stop China's Yantai Taihai Corporation from getting its hands on Leifeld Metal Spinning for security reasons.

But the withdrawal of the Chinese bid means the government's intervention "is no longer necessary", the source added.

Yantai Taihai provides services including metal processing and smelting to the civil nuclear power market in China.

Its target Leifeld, the 200-employee firm in the northwestern German town of Ahlen, makes high-strength parts for the car and aerospace industries that also have nuclear applications.

By preemptively pulling the plug on the deal, Yantai Taihai avoids the embarrassment of being the subject of Berlin's first-ever veto of a takeover by Chinese investors for strategic reasons.

The spokeswoman for the Leifeld company, owned by sole shareholder Georg Kofler, said the firm was now looking into a listing on the Frankfurt stock exchange.

"An initial public offering is being considered," she said.

The Chinese pullout comes just days after Berlin took the unusual step of thwarting efforts by other Chinese investors to buy a 20-percent stake in an electricity transmission firm.

Citing "national security" reasons, the German government tasked a public bank with purchasing the stake in 50Hertz itself.

- 'Objective view' -

Germany has grown increasingly wary of China's huge interest in recent years, following a raft of investments in sectors ranging from robotics to automobiles to finance in recent years.

A study by consultancy EY found Chinese companies bought 54 German firms last year and invested $13.7 billion in Europe's largest economy.

Domestic intelligence chief Hans-Georg Maassen has said in the past that "one won't need to spy if one simply buys up entire companies."

But Beijing has insisted it has no ulterior motives.

Ahead of the Leifeld decision, China's foreign ministry said it "hoped Germany can take an objective view of Chinese investment".

Berlin last year toughened rules for foreign takeovers, by extending the range of companies eligible for a probe under "critical infrastructure" provisions or considered to be developing "key technologies".

But under current legislation, the government is allowed to block an investment from a non-EU country only if the investor wants to take 25 percent or more.

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