A bitter row has reignited between the US and the European Union (EU) over subsidies for their aircraft makers Boeing and Airbus.
Mr Mandelson said that Europe would defend its interests to the full
The EU has revived a case against US state aid to Boeing at the World Trade Organisation (WTO), 24 hours after the US did the same against Airbus.
Despite optimism that a deal was on the cards, the row has simmered for weeks.
Both sides have accused the other of intransigence, and even of hanging up the phone in the middle of talks.
EU Trade Commissioner Peter Mandelson laid the blame for involving the WTO squarely at the door of the US and blamed Boeing's lobbying power in Washington.
He told the BBC that it was unnecessary to plunge the WTO into "this sort of gladiatorial contest".
"It's not a trade war, it's a dispute which needn't go to the WTO," he told Radio 4's PM programme.
Speaking to journalists earlier in the day, Mr Mandelson said America's decision "will, I fear, spark probably the biggest, most difficult, and costly legal dispute in the WTO's history".
"It will be hard fought on both sides and I can assure you Europe's interests will be fully defended."
On Monday, the EU had offered to cut aid to Airbus and suggested that the two sides continue talks that started in January.
US trade officials reacted by saying that the offer did not go far enough, especially since the EU was planning to commit $1.7bn in new launch aid to Airbus.
Airbus is 80%-owned by the European Aeronautic Defence and Space Co, with the remaining 20% controlled by Britain's BAE Systems.
"The EU's insistence on moving forward with new launch aid is forcing our hand," US trade representative Rob Portman explained.
Each side has accused the other of distorting the world market for aircraft by unfairly supporting their national manufacturers.
The Europeans say that Boeing receives illegal subsidies in the form of military contracts and tax breaks.
The US, meanwhile, accuses the EU of having funded Airbus's latest A380 super-jumbo project with generous subsidies.
In an effort to avoid heading to the WTO, Brussels reportedly offered to cut aid for the Airbus A350 mid-sized jet by up to 30%.
The A350 project is particularly sensitive since the mid-sized plane represents a direct challenge to Boeing's Dreamliner. Airbus already has taken on the Boeing 747 with its A380 aircraft.
The project is supposed to cost $3bn, about a third of which is likely to come from European governments.
When news of the latest EU offer came out, the US accused Brussels of "spinning to the press" and said neither side was supposed to be making their proposals public.