Sun Belt Water is suing Canada for up to $10.5bn (C$15.75bn) in compensation for Canada's refusal to allow it to buy bulk water.

The BBC's Ian Gunn: The pressure is on

The suit has been filed under Chapter 11 of the North American Free Trade Agreement (Nafta).

However Canada's Environment Minister, David Anderson, has insisted that the legal challenge is weak.

Earlier, he said: "Bulk water is not a commodity of trade ... There's absolutely no reason to treat it as a trade commodity by taking it to Nafta or the World Trade organisation or any other trade organisation."

A Canadian Foreign Ministry spokesman said on Friday that the government had 90 days to study the suit and agree to the composition of a three-person arbitration tribunal.

Valuable resource

A billion people around the world are short of water

Canada, which has about 25% of the world's fresh water, has long been under pressure to allow exports.

With about a billion people across the globe lacking sufficient fresh water, companies are lining up to transport Canada's water to the Middle East, Asia and America.

A leader in Canada's Globe and Mail newspaper said Canada seems like an easy target because it does not have comprehensive water legislation, despite imposing a moratorium on exports.

Canadian environmentalists say Sun Belt is attempting to use Nafta to overrule environmental laws.

'Not a trade issue'

Canadian Foreign Affairs Minister, Lloyd Axworthy, has said Nafta does not give Americans the right to tap into Canadian water.

Scientists have warned about low water levels in North America's Great Lakes

Commenting on a recent recommendation of a moratorium on sales of water from the Great Lakes, he said the US-Canadian International Joint Commission - which regulates shared water - had made it very clear "this is not a trade-related matter, it's an environmental matter".

However analysts say that such understanding of the Nafta trade rules is not likely to survive an official challenge.

Chapter 11 of the Nafta agreement between Canada, Mexico and the United States allows companies to sue governments if their regulations or laws hurt firms' international investments.

Long-running dispute

Sun Belt, based in California, and a Canadian partner company, Snowcap Waters, sued the Canadian province of British Columbia in 1993 after it banned bulk water exports.

The province settled with Snowcap in 1996 for C$335,000 but did not reach an agreement with Sun Belt.

Sun Belt claims it has been "mistreated" by the provincial government and courts in British Columbia.

The firm's chairman, Jack Lindsey, is quoted as saying: "I am demanding the restoration of the licence I had in the first place. Canadian courts cannot block me."

The BBC's Ian Gunn in Vancouver says Canadians are watching the latest development with concern, and are beginning to wonder how much control they really have over their fresh water supply.