This is not a risk for healthy, full-term infants, who are fine if their parents mix the powdered formula at home, the Food and Drug Administration said.
"We need to be really clear we don't have evidence that full-term, happy babies at home are at risk here," cautioned FDA special nutrition chief Christine Taylor.
But neonatal intensive care units should try to use sterilized liquid formula for the more vulnerable babies in their care, the FDA advised.
The warning comes two weeks after Mead Johnson Nutritionals recalled a batch of its specialty formula called Portagen, after a premature infant in Tennessee was tube-fed the product and died of a rare infection.
The worrisome germ is called Enterobacter sakazakii, which can cause meningitis, bloodstream infections or a deadly intestinal inflammation in newborns, especially premature infants or others with weakened immune systems.
It's unclear where the germ originates, but it's causing growing concern. A number of outbreaks have occurred in neonatal ICUs around the world, and there is "compelling evidence" that milk-based powdered formula is one source of infection, the FDA said.
One study tested 141 samples of powdered infant formulas from a number of countries and found the bacteria present in 14 percent, the agency said in a letter sent Friday to hospitals nationwide.
And when doctors investigated last April's death in Tennessee, they found the bacteria in nine other infants in the same ICU, the Centers for Disease Control and Prevention reported this week.
Both government agencies advised hospital ICUs to use sterilized liquid formulas instead of powdered ones for at-risk infants. If they must use a powdered form, make it with boiling water and then cool it before feeding, FDA advised. For tube-fed babies, don't let any formula sit in the feeding bag for longer than four hours, time critical to germ growth.
FDA is investigating how the germ can get into formula.