By Francesco Guarascio

BRUSSELS (Reuters) - The European Union plans measures to block "politically-motivated" foreign investment, after Germany, France and Italy asked it to act against takeovers in sectors that could harm Europe's strategic interests.

The proposal could give the EU - which can already block takeovers on antitrust grounds - power to scrutinize "investments in the EU of strategic importance both from an economic and security perspective".

That would include defense, transport infrastructure and critical and cutting-edge technologies and could be extended to deals that put at risk a vaguely defined "economic prosperity", according to the proposal from the European Commission's industry department seen by Reuters.

The paper makes several references to China, citing, as one hypothetical example of an undesirable deal, a company receiving funds from the Chinese government to enable it to buy a European company to make a "strategic penetration of the EU market".

Germany has been making protectionist noises after a spate of Chinese takeovers of its technology companies. Home appliance maker Midea's <000333.SZ> acquisition of robot-maker Kuka <KU2G.DE> was just one of the Chinese deals last year with a total worth of more than $10 billion, about 40 times as much as in 2015, according to Thomson Reuters data.

Some EU countries have their own rules to protect strategic firms, but this would be the first at the EU level and would go beyond the usual scope of such measures which are usually related to national security.

Under the proposal, the EU could block takeovers by a company whose motivation is "just for the purpose of disposing its overcapacity" - which could include sectors such as steel where Europe accuses China of dumping under-priced goods.

The blocking mechanism could also apply to takeovers of EU companies by an EU-based subsidiary of a foreign firm, or even in cases of "infiltration of the management with individuals from non-EU countries" who could access data and technology, the paper said.

The plan would need the approval of all Commission departments, including trade officials, who are usually less favorable to protectionist measures. EU states and the European Parliament would then have to adopt the proposals.

To avoid an excessive concentration of power in Brussels at a time of rising euroscepticism, the proposal suggests EU states would maintain the right to allow or deny a takeover even after EU vetting.

Under a bolder option of the plan, a new EU agency would be set up to examine foreign investments, although this could attract EU bashing if an investment is rejected to the detriment of EU companies' growth prospects, the paper said.

(Editing by Robin Pomeroy)