"As an initial response to China's continued militarization of the South China Sea we have disinvited the PLA Navy from the 2018 Rim of the Pacific (RIMPAC) Exercise," said Lieutenant Colonel Christopher Logan, a Pentagon spokesman.
PLA is the English-language acronym of China's military, the People's Liberation Army.
Logan did not specify what else the US government might do to respond but stressed there was "strong evidence" that China had deployed anti-ship missiles, surface-to-air missile systems and electronic jammers to contested features in the Spratly Islands.
"We find that a very unconstructive move," China's top diplomat, Wang Yi, told reporters in Washington after meeting with US Secretary of State Mike Pompeo.
Wang described its activity in the South China Sea as self-defense, saying it was working on a "much smaller scale" than what the United States had done in Hawaii and Guam.
"We hope that the US will change such a negative mindset."
Over the weekend China's air force landed bombers on disputed islands and reefs in the South China Sea as part of a training exercise in the region, triggering concern from Vietnam and the Philippines.
The Rim of the Pacific exercise, known as RIMPAC, is billed as the world’s largest international maritime exercise, held every two years in Hawaii in June and July, and China has attended previously.
Abraham Denmark, a former deputy assistant secretary of defense for East Asia under President Barack Obama, said the move was largely symbolic.
"To me it shows that the relationship is veering towards increasingly intense competition and the Pentagon sees diminishing returns on the value of military to military cooperation with China," Denmark said.
US President Donald Trump has praised China in recent months for its help putting pressure on North Korea, even amid concerns about a potential trade war between Washington and Beijing, the world's two largest economies.
Earlier this month the United States said it had raised concerns with China about its latest militarization of the South China Sea and said there would be near-term and long-term consequences.
Pentagon officials have long complained that China has not been candid enough about its rapid military build-up and using South China Sea islands to gather intelligence in the region.
Chinese officials have accused Washington of viewing their country in suspicious, “Cold War” terms.
"On the so-called militarization in the South China Sea, we talked about this issue just now ... It is a normal deployment and has nothing to do with militarization," Wang said.
The United States has dispatched warships to disputed areas of the South China Sea in a bid to challenge China's extensive sovereignty claims in the territory, which is subject to various claims by China, Vietnam, the Philippines, Taiwan, Brunei and Malaysia.
