European Union subsidies given to sugar producers have violated global trade rules, according to a preliminary ruling by the World Trade Organisation.
The decision is a major victory for Brazil's sugar producers
At a meeting in Geneva to discuss free trade, the WTO upheld a complaint filed by Brazil, Australia and Thailand.
They accused the EU of breaking trade rules by providing sugar export subsidies in excess of WTO limits.
Development agency Oxfam called the WTO's decision "a triumph for developing countries".
The WTO said that by breaking agreed limits on export subsidies the EU was hurting developing countries by undercutting their producers' prices.
Though the claim has won only preliminary backing from the WTO, the trade body rarely goes back on its original decisions.
Brazil had argued that EU export subsidies on 1.6m metric tons of sugar from mostly former European colonies in Africa, the Caribbean and the Pacific should be counted within, not in addition to, the EU's agreed limits.
Brussels claimed its sugar policy was legal and warned that if Brazil chooses to boost sugar production and prices fall, this could, in turn, harm poorer developing countries, particularly in Africa and the Caribbean.
According to Brazilian Agriculture Minister Roberto Rodrigues, the decision means the EU will have to cease exporting two million tons of sugar from next year while Brazil will be allowed to export 10% more.
This is the second time in two months that Brazil has won a case against a major country's farm subsidies.
In June, it won a WTO case claiming that US cotton subsidies had undermined Brazilian farmers by driving prices artificially low.
Brazilian foreign minister Celso Amorim said his
government is "very satisfied" with the latest decision by the WTO.
"Another important step has been taken to eliminate the
distortions of the international market in farm products,"
Mr Amorim said.
WTO states agreed over the weekend to push ahead with talks on slashing farm subsidies with the aim of eventually eliminating all direct aid to exporters.