The European Union (search) and its allies got the go-ahead on Tuesday to slap potentially heavy sanctions on U.S. goods in a row that could stir trade tensions ahead of the U.S. elections.

World Trade Organization (search) (WTO) arbitrators backed the EU and seven other WTO members in their demand to punish a U.S. failure to revoke an anti-dumping law — the so-called Byrd amendment — declared illegal by the Geneva-based body.

EU Trade Commissioner Pascal Lamy said in Brussels that the ruling was "as we expected," but that the 25-nation bloc had yet to decide whether to apply sanctions and on which goods.

A spokesman for U.S. Trade Representative Robert Zoellick (search) in Washington repeated a long-standing pledge to "work closely with Congress" in order to comply with WTO regulations.

The U.S. government has urged Congress to repeal the controversial measure, which passes on anti-dumping levies to U.S. firms, but the law enjoys strong political backing because it is seen as helping struggling industries.

"The United States remains committed to resolving this issue in a way that promotes the competitiveness of American workers," said spokesman Christopher Padilla.

The arbitrators, in a ruling running to more than 60 pages, set no fixed amount for the retaliation, but laid down a formula which complainant countries could apply.

The disputed law, named after Sen. Robert Byrd, D-W.Va., (search) forces the government to distribute to U.S. companies money raised in anti-dumping duties levied on foreign firms.

Under world trade rules, such levies can be imposed when companies accuse trading rivals of selling goods at artificially low prices to grab market share.

But the European Union, Japan, Canada, Brazil, India, Mexico, Chile and South Korea argued successfully at the WTO that those payments, to U.S. ball bearing, steel, candle, pasta, seafood and other companies, amounted to an illegal subsidy.

They had asked to be able to hit back with sanctions for the same amount, but arbitrators set the figure at 72 percent of the duties levied during a preceding year.

Washington argued no direct damage to competitor firms could be proven and that sanctions were unwarranted.

The Byrd amendment has handed some $700 million to U.S. companies since it came into force in 2000. Prior to that, the money had gone to the U.S. Treasury.

Economists say that figure could rise to several billion dollars in coming years when disputed U.S. anti-dumping duties on Canadian wood start to kick in.

The spat is one of series involving the government of President Bush, an avowed free-trader accused by critics of being reluctant to bow to WTO rules when they go against the United States.

The rows have led to rumblings in Congress that the WTO is overstepping its authority.

Despite the ruling, diplomats said the EU would be reluctant to move to sanctions, which are a double-edged weapon that can also hurt exporting firms.

"It will not be overnight," said one diplomatic source in Brussels. "The legal victory has been won and the preference would be that the U.S. would simply see that there's nowhere to go on this ... (and) withdraw the law," he added.