Nadine Dorries, the digital secretary, has ordered an in-depth probe into the $40bn planned takeover of Britain's Arm Holdings by America's Nvidia - on national security as well as competition grounds.
Cambridge-based Arm designs chips licensed for use across global industry with customers including Apple, Samsung and Intel.
Its current owner, the Japanese conglomerate Softbank, agreed last September 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.
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.
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.
In addition to the CMA investigation, Britain's department for digital, culture, media and sport (DCMS) has also been gathering evidence from across government over national security concerns.
It said: "The chips, based on Arm's intellectual property, power smartphones and are contained in a considerable proportion of connected devices within homes, cars and businesses.
"While not all individual devices relying on Arm-based chips are necessarily classed as 'critical' in themselves, the security and resilience of the broader supply chain is important for UK national security."
Ms Dorries said: "Arm has a unique place in the global technology supply chain and we must make sure the implications of this transaction are fully considered.
"The CMA will now report to me on competition and national security grounds and provide advice on the next steps.
"The government's commitment to our thriving tech sector is unwavering and we welcome foreign investment, but it is right that we fully consider the implications of this transaction."
The CMA will now have 24 weeks to carry out its investigation and deliver its report to the digital secretary to decide whether to act to remedy any adverse consequences or refer the case back to the regulator to take any action over competition concerns.
Authorities in the US and China are also investigating the deal.
Nvidia has pledged to maintain the neutrality that has been central to Arm's success.
It said it planned to address the initial concerns flagged by the CMA in August and that it would continue to work with the UK government over the deal.
A spokesperson said: "The phase two process will enable us to demonstrate that the transaction will help to accelerate Arm and boost competition and innovation, including in the UK."