However, they cut down United States demands for retaliatory sanctions by two-thirds to $191.4m (£120m) - down from more than half a billion dollars.

Greg Wood reports : "A partial victory for the US"

In their highly-technical 150 page ruling the three WTO experts suggest four ways in which Brussels can bring its import regime in line with international rules.

Senior EU officials have meanwhile confirmed that the union will "comply" with the ruling, but said they would reserve the right to appeal against it.

One Brussels official, though, said the EU had "no intention of dragging this out".

Others pointed to the fact that the WTO team had provided "a legal basis for resolving the dispute".

Jobs in the Scottish cashmere industry are under threat

European officials insist that the WTO panel has approved the principle of its policy, which is to protect African and Caribbean banana producers.

An EU spokesman said: "There is no ruling here that says under WTO rules it is illegal to offer protection to those (Caribbean) producers."

Cutting down

Nevertheless, the US Trade Representative Charlene Barshefsky said: "We are pleased that the arbitrators concur with our position that the EU banana regime is WTO-inconsistent and continues to damage the US economy."

The BBC's David Brown: Italian cheesemakers are in the firing line

The US administration now has 10 days to cut down the original list of products on which it had threatened to impose punitive tariffs.

Goods targetted ranged from Scottish cashmere sweaters to French hand bags, Italian cheese and German coffee makers.

Products that remain on the list will see their prices double in the US.

Peter Scher, America's top negotiator on agriculture matters, said a decision on what products will be removed from the list and what items will be subjected to 100% tariffs will be made within the next few days.

The United States will choose products in an effort to exert maximum political pressure on EU politicians to change their position on the banana barriers, Mr Scher said.

Preferential treatment

Claire Doole: "The World Trade Organisation will be hoping that both sides will abide by its latest ruling"

The banana row centres on the preferential treatment that the EU gives to banana producers from former African, Caribbean and Pacific colonies at the expense of Latin American growers and their US backers.

The US case was driven by complaints from two US food distributors, Chiquita and Dole, who are know to have made large financial contributions to both parties in Washington.

As the six-year trade battle culminated, the WTO was asked last month to rule on whether the EU had done enough to amend its import regime and on whether retaliatory American sanctions were legitimate.

The EU argued it had changed its import rules to bring them into line with WTO regulations.

UK worries

The size of the sanctions now permitted is negligible compared to the volume of transatlantic trade. However, some industries could be devastated should they be hit.

The Scottish Cashmere industry is one of them.

Jim Thompson, of the Hawick Cashmere Company, said the sanctions would cause major problems for his industry in Scotland.

"The Americans are unaware how polarised the cashmere industry is in the Borders," he said. "It will have catastrophic affects - if this actually goes through we are looking at a thousand jobs in the Borders," he told BBC Radio Scotland.

The US is also engaged in a trade battle over the European Union's ban against American beef raised with growth hormones.