The European Commission (EC) and President George Bush have engaged in a war of words about subsidies given to aircraft makers Airbus and Boeing.
America and Europe go nose-to-nose as competition increases
President George Bush threatened to complain to the World Trade Organisation (WTO) about subsidies given to aircraft maker, Airbus.
In response, the EC raised questions about subsidies paid to Boeing.
Both sides say that the current rules governing subsidies given to aircraft makers need to be revised.
The issue of state aid has become increasingly emotive as competition in the industry has increased.
Airbus delivered 305 planes last year, 24 more than Boeing.
More than 40,000 Boeing workers have lost their jobs in the past three years and it is only this year that Boeing has started to recover from its post-September 11 losses.
The current row erupted last week when President Bush, who is in the midst of campaigning for re-election, was speaking to Boeing workers and threatened to take Airbus to the WTO.
"I've instructed US trade representative Bob Zoellick to inform European officials in his September meeting that we think these (Airbus) subsidies are unfair and that he should pursue all options to end these subsidies, including bringing a WTO case, if need be," he said.
The EC responded that both sides need to rethink the support they offer.
"Any discussion needs to address both direct support, as granted by European governments to Airbus in the form of loans, and indirect support, as provided by the US government to Boeing," an EC spokeswoman said.
The rules on government support to plane makers are contained in a 1992 aircraft agreement between the EU and the US .
Europe had wanted to revise this agreement in 1997 but the US rejected the proposed changes, the EC said.
Under the current agreement, European governments can lend money to cover up to 33% of plane manufacturers' research and development costs. This money is repayable with interest within 17 years.
Airbus's American critics claim the company does not have to pay the loans back if the planes are not profitable.
The same agreement allows the American government to provide indirect support, through NASA or military programmes, to Boeing. This can amount to 3% of turnover for the entire US commercial aircraft industry.
Questions have also been raised about the $3.2bn incentive package offered by Washington state to secure the assembly plant for Boeing's new 7E7 Dreamliner plane.