The US decision to impose tariffs on steel imports broke global trade rules, the World Trade Organisation has said in a preliminary ruling.
The steel industry is suffering from over-capacity
The finding has been submitted for comment to both the US government and the EU with a final ruling expected next month, diplomats said.
The EU and several other countries complained to the WTO after the US imposed tariffs of between 8% and 30% on certain kinds of foreign steel a year ago.
An official for the United Steelworkers of America said the interim finding was not surprising and he expected the Bush administration to appeal against it.
A US trade official was reported as saying the US would appeal against the ruling, if it became final, without offering any concessions.
The full report was not immediately available, but diplomats said it amounted to "a pretty comprehensive rejection of the American case".
The White House had justified its decision - made just months before billions of dollars in new farm subsidies triggered another burst of international outrage - by accusing foreign producers of "dumping" steel on the US market at below its true cost.
The EU and the numerous countries which complained, however, say US steelmakers have been slow to adjust to global over-capacity, and that the US government is simply trying to save jobs in electorally sensitive areas.
Even within the US, opponents of the policy have charged that, far from defending US jobs against unfair competition, the policy has contributed to the massive lay-offs seen in the US over the past year.
By making steel more expensive, one US industry group claimed, up to 200,000 jobs may have been lost in industries using steel in their products.