By Supantha Mukherjee and Johan Ahlander

STOCKHOLM (Reuters) -A Swedish court on Tuesday upheld a ban against Huawei selling 5G equipment in the country, dashing the Chinese company’s hopes of staging a comeback in Europe and increasing the chances of potential retaliation by China against rival Ericsson.

In October, Swedish telecom regulator PTS unexpectedly banned Huawei supplying 5G equipment to Swedish mobile firms due to security concerns raised by Sweden’s security service SAPO, a decision the Chinese company challenged in the court.

“Sweden’s security is of heavy importance and the administrative court has taken into account that only the Security Police and the armed forces together have an overall picture regarding the security situation and the threat to Sweden,” the court said in a statement.

Huawei said it was considering its options.

“It’s not unexpected based on the fact that the court is also leading their conclusions on basically the assumptions being made by SAPO,” Kenneth Fredriksen, Huawei’s Executive Vice President, Central East Europe and Nordic Region, told Reuters.

“We will continue to fight for our right to be in the (Swedish) market.”

European governments have been tightening controls on Chinese companies building 5G networks following diplomatic pressure from Washington, which alleges Huawei equipment could be used by Beijing for spying. Huawei has repeatedly denied being a national security risk.

Romania was the latest country that in effect barred China and Huawei from taking part in the development of its 5G telecommunication networks in the country.

Huawei’s troubles have not only helped companies like Nokia and Ericsson to grab market share in Europe, Samsung Electronics made its entry into the continent by signing British telecoms group Vodafone as a customer for supplying 5G network equipment.

China’s embassy in Sweden could not immediately be reached for a comment. But Beijing had previously reacted angrily to Huawei being called a security threat.

It had asked Sweden to “immediately correct the mistake” of banning Huawei and issued a veiled warning this month that it might take retaliatory action against Ericsson.

An Ericsson spokesman said the PTS decision, now affirmed by the court, “may adversely impact the economic interests of Sweden and Swedish industry, including those of Ericsson.”

Ericsson, which gets roughly 10% of its revenue from China, has voiced concerns about banning Huawei and flagged risks of losing market share in China.

A SAPO representative declined to comment and referred questions to PTS. PTS said it would need to analyze the verdict before giving any comment.

(Reporting by Johan Ahlander and Supantha Mukherjee in Stockholm; Editing by Simon Johnson, William Maclean, Catherine Evans)