In a stock market filing, CRCC said Nigeria's transport ministry had taken over control of work on the 1,315km line between southern Lagos city and northern Kano and would take about 90 days to "redefine" the scope of the contract.

The setback to one of the most important of a host of infrastructure deals between China and African governments in recent years is a sharp reminder of the challenges Chinese state companies face as they expand into developing markets overseas.

The Lagos-Kano line, which accounts for almost 14 per cent of the total value of CRCC's outstanding contracts, was backed by Olusegun Obasanjo, the former Nigerian president, and sealed in the days before a China-Africa summit held in Beijing in late 2006.

The Export-Import Bank of China, a policy lender, promised to back the project with $1bn in soft loans, but it appears to have fallen victim to a broad review of deals agreed under Mr Obasanjo that is being driven by Umaru Yar'Adua, his successor as president.

Reuters quoted a Nigerian presidential spokesman saying last week: "The Federal government had suspended the execution of the Chinese railway contract because this administration had discovered that the contract was over inflated.

"Everything about the contract was wrong. There was no fund allocated for the project other than a promise by the immediate past administration to give the Chinese company an oil block." he added.

It was unclear if the move would affect CRCC's involvement in the development of a free trade zone in Lagos that was agreed during a visit to Nigeria last year by Li Yuanchao, Communist party chief of eastern Jiangsu province.

CRCC, formerly the railway-building unit of the People's Liberation Army, has also signed a $300m road project in Nigeria.

CRCC declined to comment on the implications of the review of the Lagos-Kano line, the second public setback in just a few weeks for the Chinese company, which raised $5.4bn in a dual public offering in Hong Kong and Shanghai in March.

In late October, CRCC shares were hit by news it had lost $46.8m on its foreign exchange holdings in the third quarter, prompting the company to promise to move quickly to reduce exposure to foreign currencies.

The proportion of new contracts won by CRCC that involve projects overseas has fallen sharply in the past two years.

The railway and road builder says such deals amounted to only Rmb27.5bn ($4bn) in the first nine months of 2008 compared to Rmb189bn in domestic contracts.