The possibility of a trade war between the EU and the US moved a step closer yesterday when the European Commission said Washington measures to reduce the impact of its increased steel tariffs were "manifestly insufficient".

The report will form the basis of the Commission's proposals for retaliatory action, which will be put to trade officials on Friday and discussed by EU foreign ministers on Monday.

The EU could begin retaliation as early as August 1st, raising tariffs on a targeted list of US exports by €379 million. EU foreign ministers will have to decide if they wish to escalate the trade row, affecting products from textiles to fruit juice, sending another negative signal to already volatile stock markets.

The fall-back option would be to defer retaliation at least until mid-October, giving the American administration more time to make concessions.

The Commission took a tough line in the report presented yesterday but said the impact of the protectionist tariffs since their introduction in March was more marked in the US than in the EU.

In part, this is because the EU has taken precautionary steps to guard against a flood of steel imports diverted from the US market.

The report stressed that the US market was being distorted by artificially high prices.

Mr Anthony Gooch, spokesman for the trade commissioner Pascal Lamy, said the increase in prices on the American market was keeping alive mills and plants in America that had previously been uneconomic. "In some cases, corpses are standing up and walking again," he said.

The US administration has so far published four lists of steel products that are exempted from the increased tariffs. Mr Gooch said the exclusions granted so far were insufficient.