The US must boost its computer security, congressional advisers say
China is pursuing new technology "aggressively", it says, legitimately through research and business deals and illegally through industrial espionage.
China has also "embraced destructive warfare techniques", the report says, enabling it to carry out cyber attacks on other countries' infrastructure.
A foreign ministry spokesman in Beijing denied any spying activities by China.
"China and the US have a fundamental common interest in promoting sound and rapid development," said Liu Jianchao, quoted by the Associated Press news agency.
The allegations were made by the US-China Economic and Security Review Commission in its annual report.
The advisory panel, appointed by Congress, recommended that US security measures and intelligence be stepped up to try to prevent the theft of military technology, in particular.
"Chinese espionage activities in the United States are so extensive that they comprise the single greatest risk to the security of American technologies," the report said.
It urged Congress to study "military, intelligence and homeland security programmes that protect critical American computer networks and sensitive information, specifically those charged with protecting networks from damage caused by cyber attacks".
The report also identified other grounds for concern, such as the fact that the Chinese are manufacturing "sophisticated weapon platforms" speedily and efficiently.
The unexpected pace of China's military development has fuelled analysts' suspicions that it is being helped by stolen information, the commission said.
In addition, the Chinese media - firmly under state control - are being used to create "deep feelings of nationalism", it said.
In an international crisis, the panel warned, that could turn misunderstanding into conflict.
The report also criticised Chinese economic policy, saying that small and medium-sized American businesses "face the full brunt of China's unfair trade practices, currency manipulation and illegal subsidies for Chinese exports".
The BBC's Vincent Dowd in Washington says that this is a hard-hitting report which will be consumed eagerly and with concern in the US capital.