Mr Morrison made the announcement late on Friday afternoon and said that in "making this decision, national interest concerns have been paramount. They relate to the transaction structure as currently proposed and the nature of the assets".

"After due consideration of responses from bidders to my preliminary view of 11 August 2016, I have decided that the acquisition by foreign investors under the current proposed structure of the lease of 50.4 per cent of Ausgrid, the NSW electricity distribution network, would be contrary to the national interest. This is consistent with the recommendation from the Foreign Investment Review Board," he said in a statement.

The decision leaves open the possibility that a future bid, or bids, from foreign investors could be found to be acceptable.

But it also complicates the NSW government's plan to fund the construction of new infrastructure through the sale of Ausgrid.

The two bidders, the Chinese government-owned State Grid Corporation and the Hong Kong-based company Cheung Kong Infrastructure, had been in the running to secure the 99-year lease for the 50.4 per cent stake, in a deal that was expected to be worth about $10 billion to the state government.

NSW Premier Mike Baird urged potential future bidders for Ausgrid to engage as early as possible with FIRB.

He said the federal government had acknowledged that foreign investment issues "should have been resolved much earlier" in relation to State Grid and CKI.

"There are learnings from that," he said. "But ultimately what we're about is getting the best possible outcome and I'm still very confident that's exactly what we'll achieve for NSW.

"There are many speed bumps in all sorts of transactions. That's all I view this as."

Mr Morrison has been tight-lipped about the reasons for his decision to block the sale, citing national security, but had given the two bidders a week to reconfigure their bids in an attempt to assuage those concerns.

"In making this decision, national interest concerns have been paramount. They relate to the transaction structure as currently proposed and the nature of the assets," he said.

"The proposed 99-year lease of 50.4 per cent of Ausgrid forms a part of the NSW government's plan to unlock capital to fund investment in new infrastructure across the state. The Australian government continues to support the NSW government's plan in this regard.

"Australia welcomes foreign investment where it is not contrary to our national interests."

Mr Baird said Mr Morrison's statement showed "he is open to foreign investment, he is open to new bidders".

The NSW Premier said it was "business as usual" and he still anticipated proceeds from the Ausgrid privatisation would be received in time for inclusion in next year's state budget in June.

The federal government's initial decision was met with howls of outrage in some sections of Chinese state media, who were swift to point out another perceived case of Australian bias against Chinese investment.

China's official Xinhua news agency said in an English-language editorial that to "suggest that China would try to kidnap the country's electricity network for ulterior motives is absurd and almost comical".

And in a statement, the Hong Kong-based CKI said it believed that "the Australian government must have reasons beyond the obvious which led them to make today's [Thursday's] announcement. The issue is unrelated to CKI."

Ausgrid operates the central Sydney and Newcastle networks, with Endeavour serving western and southern Sydney, along with the Illawarra.

The Treasurer would not say what specific security concerns there were about the sale of the asset, nor why State Grid had been able to buy South Australian power assets but not those in NSW.

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