Mexico has cancelled the construction of a high-speed train and re-ordered the bidding process for the $4.3bn contract.
Mexico's President said he wanted to avoid "any doubts about the legitimacy and transparency" of the bidding process.
The announcement sent stocks in the Chinese company that lost the contract tumbling by 5.8%. For its part, China Railway Construction said it hadn't received an official cancellation notice from the Mexican government, Bloomberg reported.
The bidding process had come under intense scrutiny from Mexico's opposition party, which said the only bid by the group was too expensive and that not enough time was allowed for potential rival bids to be heard.
President Enrique Pena Nieto is set to visit Beijing next week as ties between the two countries strengthen.
Construction of the 130 mile rail line from Mexico City to Queretaro was due to begin in December this year, although the start date is now likely to be delayed.