The U.S. Commerce Department has imposed new export restrictions against China’s ZTE for alleged Iran sanctions violations, dealing a blow to the company’s efforts to expand its smartphone business in the United States.

The restrictions bar U.S. manufacturers from selling components to ZTE, the number four smartphone vendor in the U.S. with a 7% market share. Some of ZTE’s smartphones use chips from Qualcomm; Intel is also a supplier.

Announcing its decision Monday, the Commerce Department said ZTE had planned to use shell companies “to illicitly reexport controlled items to Iran in violation of U.S. export control laws.”

“I’m shocked and surprised. We are very disappointed by this situation,” Cheng Lixin, head of ZTE USA, told the Wall Street Journal. “We will work with the [U.S.] government to try to solve this issue.”

ZTE has been increasing its investments in the U.S. smartphone market, sponsoring National Basketball Association teams and trying to sell more high-end phones using U.S. components such as Qualcomm’s mobile processors. Its products include moderately priced smartphones with features it says are comparable to those on costlier phones from Apple and Samsung.

In the fourth quarter of last year, the U.S. was the single biggest market for ZTE smartphones, accounting for 24% of the company’s global shipments, while China made up 22%, according to research firm Canalys.

“ZTE found more success with its handset business, but now this threatens to unravel its progress there,” Duncan Clark, chairman of consulting firm BDA, told the WSJ.

Although ZTE is not being banned from selling handsets in the U.S., the restriction could disrupt handset production.

Some U.S. trade groups were critical of the Commerce Department’s decision, saying it would hurt the U.S. tech sector.

“It is a case of cutting off our nose to spite our face,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation. “If the Department of Commerce restricts exports of U.S. technology suppliers to ZTE, it will mean less economic activity and jobs in the United States.”

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