A looming trade dispute between the EU and the United States could have damaging consequences for Irish exporters, the Government has been warned.

An escalation of the Foreign Sales Corporation and Steel Corporation stand-offs into a round of tit-for-tat sanctions would seriously undermine trade between the Republic and the US, the Irish Exporters Association said.

Tensions between the two blocs has come at the worst possible time for exporters, who are struggling after a two-year downturn, said Mr John Whelan, chief executive of the association.

The Republic's "special relationship" with US businesses cannot be allowed to suffer, said Mr Whelan.

He said: "We cannot afford the full scale trade war which is now looming The Irish Government must become more active at EU and WTO level in helping to resolve these trade disputes. As an exporting nation with our largest export market in the US, we must push these issues up the agenda at Cabinet meetings."

He added: "Over the past two years Irish exporters have been facing a continuous rise in the cost of trading with the US associated with anti-terrorist measures."