Tencent's (HKG:0700) addition to a blacklist of the US Department of Defense for alleged ties to the Chinese military could stoke a bigger tech war between the US and China, the South China Morning Post reported Tuesday.

While the US Defense Department's action does not have legal consequences, it could be fodder for the US Treasury to issue more sanctions and trade restrictions against Tencent, restricting it from purchasing advanced technology, the report said.

Tencent said the Pentagon's blacklisting was "clearly a mistake" as it is not a military company or supplier, the report said.

The internet giant is among five new companies the US thinks is a threat to national security, according to the report.

Shares in Tencent closed 3% lower in Hong Kong on Wednesday.

(Market Chatter news is derived from conversations with market professionals globally. This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed.)