US private equity firm Carlyle is in talks to take a minority stake in a Chinese construction equipment maker following another setback in its 18-month attempt to secure regulatory approval for a deal, according to sources.

Carlyle agreed in October 2005 to pay $375 million (€284 million) for an 85 per cent stake in Xugong Construction Machinery, a listed company whose parent is controlled by the local government of Xuzhou city, after a year-long public auction.

But the deal got caught in a backlash over foreign investment and the merits of private equity investment. Carlyle was forced to cut its planned investment to 50 per cent. The revised deal was approved by the government body that monitors state-owned assets.

However, it was rejected by superior regulators on the grounds the sector is of "strategic" importance. Caijing, an influential Chinese business magazine, said this month the commerce ministry had rejected the revised bid. According to people familiar with the situation, Carlyle is discussing taking a 45 per cent stake in Xugong and could resubmit the deal for approval over the next few weeks. - ( Financial Times service )