Sales of highly sensitive equipment from a Chinese company to an Iranian company helped with Iran's missile development program, the State Department said Thursday in announcing penalties against the businesses.

Taking aim at China (search), State Department spokeswoman Julie Reside said the United States will not "paper over" its differences with Beijing (search). She warned that the Bush administration will take action in response to proliferation activities by the Chinese government. She did not elaborate.

The companies are Iran's (search) Shahid Hemmat Industrial Group and the North China Industries Corp.

Reside said the penalties, which took effect May 9, essentially ban U.S. trade with the companies and all government dealings with them for two years.

Reside, citing export controls imposed by China, said the country's nonproliferation performance is improving.

But, she said, "problems remain in the China's enforcement and implementation of these regulations, as these sanctions indicate."

On several occasions in recent years, the United States has penalized Chinese companies for proliferation activities. This was the first time an announcement of penalties was accompanied by a warning to the Chinese government.

Last July, the administration punished nine Chinese entities for transferring weapons technology or related goods to the Middle East. Officials said the recipient country was Iran.

At the time, China denied the U.S. allegations and said China supports the complete destruction of weapons of mass destruction.

Iran's Shahab 3 missile has an 800-mile range, enough to reach Israel and U.S. troops stationed in an area extending from Turkey to Afghanistan.

U.S. officials have said Iran is attempting to develop an upgraded missile capable of reaching a number of NATO countries in Europe.