The US and the European Union appeared to be heading for a truce in their dispute over banana imports, after the head of the World Trade Organisation (WTO) intervened to stop the conflict escalating into a damaging trade war.

Hopes of a settlement rose last night after Mr Renato Ruggiero, WTO director-general, proposed to US and EU ambassadors in Geneva a peace formula intended to avert a US threat of sanctions on $520 million (€450 million) of European exports from February 1st.

Senior officials in Washington and Brussels were expected to decide this weekend whether to back the outline deal. Trade diplomats said it was likely to face stiff resistance from hawks in both capitals who opposed backing down.

But they said failure to reach a compromise could hurt European exporters and severely damage the WTO, whose 133 members are already deeply split over the conflict.

The US insists it is entitled to impose sanctions on the EU because Brussels has not complied with a WTO disputes ruling against its banana regime, which favours imports from former French and British colonies in Africa, the Caribbean and the Pacific.

Although the EU has amended the regime, Washington says it still discriminates against US distributors of Latin American fruit. But Brussels says the US cannot legally impose sanctions, because the WTO has not ruled against the modified regime.

Mr Ruggiero's plan is understood to call on the US to postpone a decision on sanctions until a recently established WTO disputes panel rules in late March on the EU's banana regime. The EU would be asked to agree to the panel arbitrating simultaneously on the proposed US measures.