By Patrick Bartlett BBC Europe Business Correspondent

The World Trade Organisation (WTO) has ruled that the European Union (EU) can impose $4bn (�2.6bn) worth of sanctions against the US in a dispute over tax breaks for its exporters.

The WTO has given the thumbs up for sanctions

The WTO has backed the EU's claim that the tax scheme amounts to a massive illegal subsidy which costs European companies billions a year in lost trade.

This is the biggest transatlantic trade dispute in history.

The damages are the highest awarded by the Geneva-based WTO, since its creation in 1995.

Defeat

WTO panels have repeatedly ruled that the US tax breaks for exporters contravene international trade rules.

Washington has tinkered with the system, but - faced with massive opposition from US corporations - it has failed to satisfy the WTO's demands for reform.

The huge damages awarded were in line with the EU's calculations.

They represent a spectacular defeat for the US.

It had argued the financial benefit to US companies was in the region of $1bn.

"I am disappointed that the arbitrator did not accept the lower figure put forward by the United States," said US trade representative Robert Zoellick.

Holding fire

The EU's external affairs commissioner, Chris Patten, welcomed the ruling.

"We never had any doubt that the position we have taken was going to find that it was in line with the international rule book on trade," he said.

However, the European Union has already said it will hold fire on imposing the sanctions in the hope that the threat alone will force Washington to make the necessary changes.

"[The WTO] has given us an amount of potential countermeasures which will create a major incentive for the US to eliminate this huge, illegal export subsidy," said the EU's trade commissioner, Pascal Lamy.

It also fears that such hefty sanctions could provoke a political backlash in America which could severely damage transatlantic trade relations.

The WTO's director-general, Mike Moore, said the EU and the US should get together to resolve the dispute "in an amicable and constructive fashion".

"The European Union and the United States are among the most important members of this organisation and both hold a special responsibility to ensure the continued health and soundness of the WTO and global trading system," he said.

"I believe that today's findings will ultimately be rendered moot by US compliance with the WTO's recommendations and rulings in this dispute," Mr Zoellick said.