The Pentagon added a slew of Chinese companies, including Alibaba Group, Baidu Inc and carmaker BYD, to a list of entities it believes have aided the Chinese military, complicating the fragile diplomatic relationship between Washington and Beijing.

The Defense Department published an updated "1260H list" Monday evening stateside — a roster of companies the Pentagon considers affiliated with China's military or defense industrial base.

The designations do not impose sanctions explicitly, but mean the Defense Department will be prohibited from contracting directly with listed companies starting later this month, and from procuring their products or services through third parties beginning in June 2027.

"These indirect restrictions could force some U.S. firms that work with the U.S. military to drop designated Chinese firms as suppliers," said Michael Hirson, head of China Research at 22V Research.

Baidu's American depositary receipts dropped 2.1%, Alibaba slumped 0.8% and BYD slid 0.8%.

The additions come after President Donald Trump met Chinese leader Xi Jinping in Beijing last month, where the two leaders agreed to a trade truce and announced a joint investment and trade board. The update underscores a recurring tension in the bilateral relationship and security concerns in Washington over Chinese technology as a strategic threat.

China will take necessary measures to protect Chinese companies' legitimate rights and benefits, a spokesperson for Foreign Ministry said Tuesday, criticizing the U.S. for drawing up various discriminatory lists targeting Chinese firms under the pretext of national security.

The Pentagon briefly posted a similar expanded list in February, then withdrew it without explanation as Trump's China trip had been pending. The version released Monday largely mirrors that February update, but reinstates Chinese memory chipmakers CXMT and YMTC, which had been left off the withdrawn list — an omission that drew criticism from China hawks in Washington at the time.

Listed companies are deemed affiliated with China's State-owned Assets Supervision and Administration Commission, and designated as "military-civil fusion" contributors to China's defense industrial base through ties to the Ministry of Industry and Information Technology, according to the Defense Department notice.

The list also adds biotech giant WuXi AppTec, lidar producer RoboSense Technology and Unitree, a leading manufacturer of humanoid robots. U.S. chipmaker Nvidia announced last week its plans to work with the company to develop robots for research use.

The breadth of the additions reflects Washington's view that civilian technology companies in China are inextricably linked to state military priorities, underscoring a concern that has driven restrictions on China's semiconductors, artificial intelligence hardware and advanced manufacturing from Washington.

While the move is largely symbolic as they fall short of an investment or export blacklist, it shows how broadly Washington has drawn the line around sensitive Chinese technology, spanning consumer electronics, biotech and robotics, said Hirson.

Still, Hirson said he did not expect the U.S. Treasury or Commerce to add prominent Chinese tech firms to more formal restrictions this year, as Washington prioritizes keeping the bilateral ties on stable footing.

WuXi AppTec, Alibaba and Baidu disputed the designation and pledged to seek their removal. BYD didn't respond to requests for comment.

"There's no basis to conclude that Alibaba should be placed on the Section 1260H List. Alibaba is not a Chinese military company nor part of any military-civil fusion strategy. We will take all available legal action against attempts to misrepresent our company," the company said in a statement to CNBC.

Baidu also rejected the claim, saying that it would "not hesitate to use all options available to us to have the company removed from the list."

Electric vehicle maker NIO, among the firms added to the Pentagon's list, said Tuesday that the subsequent procurement restrictions will not impact the company business while vowing to "proactively" engage with the U.S. defense department to "correct this inclusion" on the Chinese military company list.

Some Chinese companies have sued the Pentagon to contest the listing, with Xiaomi winning a court challenge that resulted in its removal in May 2021.

The expanded list underscores "how national security concerns are increasingly shaping economic policy" in Washington, Han Shen Lin, China country director at Asia Group, told CNBC's "The China Connection" on Tuesday.

"Even as Washington and Beijing seek stability, there are still bipartisan concerns in the U.S. about China's technological and military use, and that's giving rise to tougher policies across multiple sectors," Lin added, urging business executives to weigh geopolitics in investment and corporate planning.