The European Union (search) announced Friday that it was prepared to end penalty sanctions on $4 billion worth of American exports to Europe.

However, EU officials warned they could reimpose some of the tariffs if a dispute is not resolved over a U.S. law that showers $136 billion in new tax breaks (search) on companies.

Anthony Gooch, spokesman for the European Union in Washington, told reporters that a key panel of the European Council, the governing body for the EU, had approved unanimously a measure to withdraw the sanctions.

The panel recommended ending collection of the sanctions on Feb. 1 and also approved a program to return any penalty fees collected this month in the form of rebates.

A wide range of U.S. exports — from jewelry and textiles to steel and various farm goods — had been hit by the sanctions.

The action was taken in response to passage by Congress last October of the most sweeping overhaul of corporate tax law in two decades. The measure repealed a $5 billion annual tax break provided to American exporters that had been ruled illegal by the World Trade Organization (search).

Congress passed the repeal of the illegal tax break and President Bush signed it into law in October. However, the EU complained that the legislation still did not totally conform to the WTO ruling because it allowed too long a transition period for U.S. companies to switch from the old tax break to a package of $136 billion in new tax breaks.

Gooch said the EU had decided to withdraw all of the sanctions but hold open the possibility that it could reimpose penalty tariffs on up to 60 percent of the original $4 billion in targeted products if the dispute over the transition period is not resolved.

The EU has asked the WTO to appoint a compliance panel to issue a ruling on the issue, a process that could take up to eight months to complete.

Reacting to Friday's announcement that the sanctions will be lifted, the Bush administration said the EU should have made the decision in October when the U.S. legislation was signed into law. U.S. officials also complained about the EU effort to challenge the transition rules before the WTO.

"It is harmful for the EU to needlessly prolong this matter in the face of Congress' good faith action," Richard Mills, spokesman for U.S. Trade Representative Robert Zoellick, said in a statement.

The centerpiece of the new tax breaks is a $76.5 billion measure to provide relief to America's battered manufacturing companies, which have seen the loss of 2.7 million jobs over the past four years.