(Recasts, adds White House comment, defense officials' concerns)
Sept 1 (Reuters) - President Donald Trump will decide in the next two weeks whether to block a Chinese-backed private equity firm from buying a U.S. chipmaker, putting his economic and diplomatic relations with China under a spotlight.
Lattice Semiconductor Corp said in a filing Friday it will seek Trump's approval for its proposed $1.3 billion sale to Canyon Bridge Capital Partners, gambling that the former real estate dealmaker will approve the tie-up against the advice of the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes foreign deals for national security concerns.
The decision, which the filing said will be made by the White House in the next 15 days, comes at a sensitive time. Relations are already strained between Washington and Beijing over trade and North Korea, and the Chinese communist party is preparing to hold its once-every-five-years congress next month.
The odds are not good for Lattice. If Trump approves the transaction, it would be unprecedented. U.S. presidents, who have the final authority on such investments, have always sided with CFIUS
Lattice makes chips known as field programmable gate arrays, which allow companies to put their own software on silicon chips for different uses. It no longer sells chips to the U.S. military, but its two biggest rivals, Xilinx Inc and Intel Corp's Altera, do.
The United States is also concerned about Chinas ability to acquire technologies with potential military applications. The U.S. Department of Defense has raised concerns about the Lattice acquisition, two U.S. officials said on the condition of anonymity.
Both officials said it was unclear whether the objections would sway Trump in the face of Chinese warnings that if deals are blocked, Sino-American relations may deteriorate further.
The move to seek Trump's approval, first reported by Reuters earlier on Friday, comes after Lattice and Canyon Bridge, funded in part by Chinas central government, spent eight months trying unsuccessfully to persuade CFIUS to clear the acquisition.
A White House official declined to comment on the Lattice transaction and referred further questions to the Treasury Department, which chairs CFIUS.
Lattice shares rose 0.177 percent to $5.66 on Friday, below the deal's $8.30 offer price.
The deal's problems underscore U.S. efforts to prevent the transfer of sensitive technology to China. Chinese suitors have faced intense regulatory scrutiny in their pursuit of U.S. chip makers, leading to some deals being quashed in recent years.
"Lattice remains of the view that the proposed transaction does not raise any national security concerns that cannot be addressed by the comprehensive mitigation measures that Lattice and Canyon Bridge have proposed to implement," Lattice said in its filing with the U.S. Securities and Exchange Commission.
Canyon Bridge supports Lattice's decision and believes "President Trump will recognize the benefits this investment will provide - to keep and grow jobs in the U.S. as well as expand Lattices product portfolio," it said in a statement.
Canyon Bridge had told CFIUS it will commit to almost doubling the number of Lattice's employees, according to people familiar with the matter who asked not to be identified because details of the regulatory process are confidential. Portland, Oregon-based Lattice reported 986 full-time employees worldwide at the end of December.
The latest 75-day CFIUS review of the Lattice deal, the third since it was announced in November, ended this week with the panel informing Canyon Bridge and Lattice it would recommend Trump block the acquisition if they take it to him for review.
U.S. regulatory scrutiny of the Lattice deal grew after Reuters reported in late November that Canyon Bridge, based in Palo Alto, California, was funded partly by cash coming from Chinas central government and had indirect links to its space program.
OTHER DEALS AT STAKE
Canyon Bridge's ability to acquire other Western semiconductor companies could be diminished if the Lattice deal collapses. This is because most acquisition targets have U.S. operations, making them subject to a CFIUS review.
Canyon Bridge is working on a bid for British semiconductor company Imagination Technology Group Plc, the sources said. If Canyon Bridge clinches that deal, it would 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 did not respond to a request for comment.
Chinese buyers are awaiting CFIUS approval on other technology deals, including Unic Capital Management's $580 million acquisition of U.S. semiconductor testing company Xcerra Corp. (Reporting by Liana B. Baker and Greg Roumeliotis in New York; Additional reporting by Steve Holland and Diane Bartz in Washington; Editing by Jeffrey Benkoe and Cynthia Osterman)