By Richard Waddington
Yahoo News

GENEVA (Reuters) - The World Trade Organization ( news - web sites) (WTO) ruled Friday that the European Union ( news - web sites) could slam sanctions worth $4 billion on U.S. exports in retaliation for illegal tax breaks to U.S. companies, trade diplomats said.

The diplomats spoke just hours before the anxiously awaited release of the official report from WTO arbitrators, whose decision could stoke simmering transatlantic trade tensions.

"The figure is four billion dollars," one well-informed envoy close to the case told Reuters.

If confirmed by the official finding, which is due at 10 a.m. EDT, it would be by far the highest level of retaliation ever authorized since the Geneva-based international trade body was set up in January 1995.

The $4 billion figure met exactly the EU calculations for trade losses it said companies in the 15-state bloc were suffering as a result of the disputed tax concessions, granted to U.S. giants like Microsoft and Boeing.

U.S. officials had argued that just under $1.1 billion would be a fairer estimate.

European External Affairs Commissioner Chris Patten welcomed the WTO ruling.

"We never had any doubt that the position we have taken was going to find favor and that it was in line with the international rule book on trade," Patten told reporters when asked to react to the news.

"But obviously it is our concern to have everybody playing by the rules, it is our concern to minimize the fallout from problems with our biggest trade partner," he added, speaking ahead of a meeting of EU foreign ministers in Elsinore, Denmark.

The ruling, however, is unlikely to lead to immediate sanctions from the EU, which has said it will first consult industry on which products could be hit in the retaliation.

BRUSSELS COULD STAY HAND

Brussels has also said that it will stay its hand if Washington works to reform the tax regime, which gives special treatment to companies using offshore subsidiaries to trade.

The Foreign Sales Corporation (FSC), as the tax system is known, has been ruled in violation of WTO rules four times when past Washington efforts to reform it were deemed insufficient.

The last time was in January when a WTO panel was finally asked to set a figure for EU sanctions.

In a bid to hold off EU retaliation, President Bush ( news - web sites) pledged in May that the United States would comply with the WTO rulings and there have been moves in the U.S. Congress on an alternative bill to aid U.S. exporters.

But current proposals are opposed by Boeing and other beneficiaries of the tax breaks, which say that they do not go far enough.

The aeronautics company has warned that nearly 10,000 jobs could be lost unless a comparable system is devised, a powerful argument with congressional elections looming.

The EU last month steered clear at the last minute of hitting Washington with sanctions over steel after the U.S. administration agreed to exclude more European products from emergency duties it imposed in March.

But the bloc's patience on the tax issue could be tested to the limit if Congress fails to come up with a package that meets WTO rules before lawmakers adjourn for the year in October.

Trade officials have expressed concern that rows between the world's two most powerful economies could hamper attempts by the WTO's 144 member states to negotiate a new round of trade liberalization, which many economists see as vital to revive a sagging world economy.

There have been calls by some U.S. congressmen for the administration to hit back over losing the FSC case by challenging parts of the complicated EU tax laws which they say help European exporters.

-	What Is The WTO? -  summary of the organization's composition and role. From the San Francisco Chronicle.
-	World Trade Organization (WTO) -  regulates trade and tariffs worldwide. Formed as successor to the General Agreement on Tariffs and Trade (GATT).