America’s Federal Trade Commission (FTC) is suing to block the $40bn takeover of UK chip designer Arm Holdings by America’s Nvidia.

The US watchdog said the deal would give Nvidia, one of the world’s largest chip companies, control over technology and designs that rival firms rely on to develop their own chips.

It is the latest hurdle placed in the way of the takeover, two weeks after Britain’s digital secretary Nadine Dorries ordered an in-depth probe on national security and competition grounds.

The FTC alleges that the combined firm would have the “means and incentive” to stifle innovation in next-generation technologies such as data centres and driver assistance systems in cars.

It added that the proposed merger would allow Nvidia to “undermine its competitors, reducing competition and ultimately resulting in reduced product quality, reduced innovation, higher prices, and less choice, harming the millions of Americans who benefit from Arm-based products”

Holly Vedova, the FTC’s bureau of competition director, said: “Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets.

“This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.

“The FTC’s lawsuit should send a strong signal that we will act aggressively to protect our critical infrastructure markets from illegal vertical mergers that have far-reaching and damaging effects on future innovations.”

The watchdog, which works to promote competition and protect consumers, said an administrative trial in the case was due to begin next August.

It said that during its investigation of the deal it had worked closely with competition watchdogs in the EU, UK, Japan and South Korea.

Arm’s current owner, the Japanese conglomerate Softbank, agreed in September last year to sell it to Nvidia.

But an initial investigation by the UK’s Competition and Markets Authority (CMA) reported earlier this year that the deal could weaken rivals and stifle innovation and recommended that it should be more closely examined in a “phase two” probe.

The CMA said the takeover may ultimately mean more expensive or lower quality products in cutting edge technologies such a gaming, data centres, the “internet of things” and self-driving cars.

Cambridge-based Arm occupies a key position at the heart of the global semiconductor industry and more than 200 billion chips have been sold based on its technology.

It licenses its blueprints to major chipmakers such as Apple, Qualcomm and Samsung.

Nvidia, which makes graphic and AI chips, is a rival to some other companies that also use Arm’s technology – one cause for concern over the deal.

The US firm has pledged to maintain the neutrality that has been central to Arm’s success.

Responding to the FTC announcement, Nvidia said that “as we move into this next step in the FTC process, we will continue to work to demonstrate that this transaction will benefit the industry and promote competition”.