There is "clear evidence of collusion" between Huawei and the "Chinese Communist Party apparatus", a parliamentary inquiry has concluded.
And the MPs say the government may need to bring forward a deadline set for the Chinese firm's 5G kit to be removed from the UK's mobile networks.
Huawei has responded by saying "this report lacks credibility as it is built on opinion rather than fact".
But the latest accusation poses a further challenge to its business.
Although the company's options in the UK are now limited, it is still trying to sell its 5G telecoms infrastructure to other parts of Europe and beyond, having invested heavily in the technology.
"We're sure people will see through these accusations of collusion and remember instead what Huawei has delivered for Britain over the past 20 years," a spokesman for the company said.
'Communist Party links'
The House of Commons defence committee based its findings on the testimony of academics, cyber-security experts and telecom industry insiders, among others. These included some long-term critics of the company.
Hauwei's executives did not testify, although they did appear before a separate parliament committee in July.
The report cites a venture capitalist who claimed the Chinese government "had financed the growth of Huawei with some $75bn [£57bn] over the past three years", which he said had allowed it to sell its hardware at a "ridiculously low price point".
And it highlights a claim made by a researcher who specialises in corporate irregularities within China, who alleged that Huawei had "engaged in a variety of intelligence, security, and intellectual property activities" despite its repeated denials.
"It is clear that Huawei is strongly linked to the Chinese state and the Chinese Communist Party, despite its statements to the contrary," the committee concludes.
"This is evidenced by its ownership model and the subsidies it has received."
The report warns that the West should not "succumb to ill-informed anti-China hysteria", but suggests some policy changes may be necessary.
At present, the government has said mobile networks must not buy new Huawei 5G equipment after the end of this year, and then must remove any they have installed by 2027.
But the committee says ministers should consider bringing the latter deadline forward to 2025 if relations with China deteriorate or pressure from the US and other allies makes it necessary.
The MPs acknowledge being told by BT and Vodafone that such a move could cause signal blackouts in parts of the country. But they say operators could be compensated to minimise delays.
They also say Beijing had exerted pressure through "covert and overt threats" to keep Huawei in the UK's 5G network.
These are said to have included a suggestion it might block Chinese investment in the UK's nuclear industry.
The committee says that if further threats follow, the government should "carefully consider China's future presence in critical sectors of the economy".
And it recommends the forthcoming National Security and Investment Bill gives ministers the power to ban investments they deem risky.
More work is needed to work with allies to ensure there are other suppliers of telecoms equipment, the report adds.
And it calls on the government to avoid any further delay in introducing a telecoms bill to end what it describes as the current situation of "commercial concerns trumping national security".
The MPs reject claims that Huawei's continued presence in the UK affects the country's ability to share sensitive information with partners.
But the committee says it is "content" that Huawei is sufficiently distanced from sensitive defence and national security sites, and in any case it would not be able to decipher encrypted data sent via its equipment.
It does, however, urge GCHQ to continue its work with the firm at the Huawei Cyber Security Evaluation Centre (HCSEC), where the firm's equipment is checked for flaws.
Huawei funds the work done there by government experts and has indicated it is willing to continue doing so for the foreseeable future.
The MPs say the government should now consider assessing equipment from "other vendors in a similar fashion".
They also back proposals to form a D10 group of democracies to provide alternatives to Chinese technology.
Little detail has been provided about what this might actually look like, and the committee calls on the government to consult allies to set out exactly what it would entail.
Additional reporting by Leo Kelion
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