A simmering trade dispute between the United States and the European Union (EU) over subsidies to aircraft industries has turned ugly, with both sides taking their case to the World Trade Organisation (WTO).

The EU announced yesterday that it would retaliate at the WTO against a US decision to reactivate a complaint about European Union subsidies for Airbus.

The EU and the US both filed WTO suits against each other in October over subsidies, but agreed in January to shelve action to seek a negotiated deal rather than face a costly legal battle.

On Friday EU trade commissioner Peter Mandelson made a proposal on how to settle the dispute through negotiations.

However, on Monday, when he telephoned the US trade representative Robert Portman, the conversation ended in disagreement.

Late on Monday the Bush administration announced that it would bring the case to the WTO, plunging the organisation into its largest ever dispute. Washington said it would ask the WTO immediately to create an arbitration panel to resolve the dispute over European subsidies to Airbus.

The trade row concerns the vast sums paid in government subsidies to industry giants in the EU and the US - Airbus and Boeing.

In Geneva yesterday, Mr Mandelson told reporters that the US action was "highly regrettable from the standpoint of all those who believe that the WTO has better things to do with its time than referee this grudge fight of Boeing against Airbus".

The crisis this week was triggered by a request from Airbus to the British government for aid for its A350 long-haul plane designed to compete with Boeing's 787 Dreamliner long-distance jet.

The essence of the US case is that financial aid given to Airbus for new aircraft is against WTO rules, while the EU case is that Washington has been heavily subsidising Boeing through military contracts.

In Tokyo the chief executive of Boeing's commercial aircraft unit, Alan Mulally, said the only acceptable resolution to the dispute was for the European Union to stop the subsidies.