A high-stakes dispute over how the U.S. military uses artificial intelligence has led the Pentagon to cancel its contract with rising AI star Anthropic.

The dispute stems from the AI startup's refusal to remove safeguards that would prevent its technology from being used to conduct surveillance in US.

Nearly two hours after President Donald Trump announced on Truth Social that he was banning Anthropic products from the federal government, Secretary of Defense Pete Hegseth took it one step further and announced that he was now designating the AI company as a “supply-chain risk,” which Anthropic says it is willing to challenge in court.

The agreement reflects the firm’s principles on prohibiting “domestic mass surveillance and human responsibility for the use of force."

The actions mark an extraordinary rebuke against one of the premier companies that has kept the US in the lead on national security-critical AI.

Anthropic said Thursday that “virtually no progress” had been made in the company’s talks with the Pentagon over the terms of use for its AI models ahead of a Friday afternoon deadline. The Department of Defense (DOD) delivered its last and final offer to the company on Wednesday night,

When Hegseth and Amodei met Tuesday, military officials warned that they could designate Anthropic as a supply chain risk, cancel its contract or invoke a Cold War-era law called the Defense Production Act to give the military more sweeping authority to use its products, even if the company doesn’t approve.

The Pentagon clash with Anthropic and Friday's severe response from Trump and Defense Secretary Hegseth highlights a growing war over who controls military AI.