Volkswagen's MAN Energy Solutions had been due to sell the unit to Chinese group GHGT and its subsidiary Guanghan Gas Turbine, but Chancellor Olaf Scholz's "cabinet had today prohibited" the move, said the economy ministry.
Germany has rules in place allowing the government to review or block foreign purchases of stakes as low as 10 percent in "critical technology" as well as "critical infrastructure" companies.
The ministry added that it could not provide further details given security concerns as well as the company's operational secrets.
According to business daily Handelsblatt, the Chinese company is believed to have close links to the Chinese armaments industry and experts have warned that it could use the gas turbine technology for military purposes including in war ships, drones or fighter jets.
Fears have been growing in Germany about an over-reliance on Beijing, and letting critical infrastructure fall into the hands of Chinese state-linked companies.
Russia's invasion of Ukraine and its subsequent dwindling of crucial gas supplies to Europe has further accentuated the concerns.
bur/hmn/sea/rl
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