A transatlantic trade war could be looming after the World Trade Organisation (WTO) found emergency United States steel tariffs were against its rules.
The steel industry is suffering from over-capacity
The US has said it will appeal against the decision.
The EU has already drawn up a list of US products - including textiles and fruit and vegetables - totalling $2.6bn on which it wants to impose sanctions in retaliation.
But EU trade commissioner Pascal Lamy said he was confident the US would eventually comply with the WTO's demands - making sanctions uneccesary.
"It's a big legal victory for us all, which we now have to transform into an economic victory," said Mr Lamy.
"They have lost this first instance case on very obvious grounds.
"They have the right to appeal. It will just delay the problem for a few months. I believe they will lose their appeal," he told CNBC television.
"Hopefully, they will comply. If they don't then the sanctions are there to concentrate their minds," he added.
The EU had worked hard - and made painful cuts - to achieve a competitive steel industry and had the right to compete for US business, Mr Lamy said.
And he said he hoped to work with the US on the wider problem of over-capacity in the global steel industry.
He said he expected the WTO dispute to be resolved by November this year.
And he insisted trade relations between the EU and US in other areas were in "OK" shape.
President George W Bush introduced the controversial trade barriers last March, under pressure from steel manufacturers and workers.
The tariffs - of up to 30% on top of normal duties - were designed to protect America's ailing steel industry from a flood of imports.
But they provoked fury in the European Union, Japan and other steel exporting economies, which have rationalised their steel industries to compete in the world market - often at a painful cost in jobs.
On Friday, a three-man WTO panel ruled the tariffs had been introduced without proper justification.
The decision has been expected since March, when details of an interim ruling were leaked.
The case was brought to the WTO by the EU, Japan, South Korea, China, Switzerland, Norway, New Zealand and Brazil.
The US argues its tariffs are in line with the WTO's Safeguard Agreement, which allows countries to restrict imports temporarily if they threaten "serious injury" to a specific industry.
But Friday's WTO report said Washington had failed to provide a "reasoned and adequate explanation" of a link between increased imports and "serious injury" caused to US producers.
US Trade Representative spokesman Richard Mills said: "The steel safeguard measures will remain in place" while the ruling is being appealed.
"Safeguard measures are allowed under WTO rules. Many countries have used them. We believe the steel safeguard measures comply with our international obligations.
"In accordance with US law and WTO rules, the safeguard is a temporary measure, designed to help domestic producers adjust to import competition."
But US importers and manufacturers of consumer goods using steel products welcomed the WTO's earlier interim finding.
They said the tariffs had pushed up their costs and were driving thousands out of work to help inefficient steelmakers.