The US government is to take the European Union to the World Trade Organisation (WTO) in an effort to stop member states "subsidising" Airbus.
The EU and the US have been at loggerheads over Airbus' funding
Robert Zoellick, the US trade representative, said Airbus was now bigger than its US rival Boeing and continued public funding was unfair.
"This is about fair competition and a level playing field," Mr Zoellick said.
The EU said its relationship with Airbus was legal and it planned counter action over US support for Boeing.
"If this is the path the US has chosen, we accept the challenge," Pascal Lamy, the EU's trade commissioner, said.
"Not least because it is high time to put an end to massive illegal subsidies to Boeing which damage Airbus, in particular those for Boeing's new 7E7 programme."
The US and EU have 60 days to resolve the increasingly bitter dispute before the WTO will step in.
The US also said on Wednesday that it would terminate a 1992 agreement with the EU which limits levels of government support for the development of civil aircraft.
The EU maintains that financial support given to Airbus by member states is within the terms of the agreement while accusing the US of providing huge indirect support to Boeing.
Mr Zoellick said EU members had given billions of dollars of financial support to Airbus in violation of international trade rules.
He said EU governments were pumping $6.5bn (£3.65bn; 5.27bn euros) into the development of the new Airbus A380 and were considering backing a competitor to Boeing's proposed 7E7 Dreamliner, which will travel just under the speed of sound.
"Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an infant industry," Mr Zoellick said.
"If that rationalisation were ever valid, its time has long passed."
Airbus now had a 50% market share in large commercial aircraft, he added.
"Airbus now sells more large civil aircraft than Boeing."
Last week Mr Zoellick and Mr Lamy held talks to settle the issue, but failed to reach an agreement.
President Bush threatened to take the case to the WTO last month unless EU governments stopped providing loans, a move that some observers linked to the current presidential election campaign.
The US now wants to scrap the 12-year-old transatlantic agreement which governs state involvement in civil aircraft development.
Under the accord, EU governments can cover up to 33% of a manufacturer's research and development costs with loans to be repaid over 17 years.
US critics of the agreement say Airbus does not have to repay the loans if its planes are not profitable.
EU countries say the US government is providing indirect support to Boeing, through the NASA space agency and military programmes, equivalent to 3% of the industry's turnover.
Airbus was launched in 1970 by a consortium of French, German, Spanish and British companies.
It is now co-owned by European aerospace firm EADS and British defence and aerospace contractor BAE Systems.