The European Union and some of its states paid prohibited export subsidies to planemaker Airbus and must eliminate them rapidly, a World Trade Organization dispute panel said on Wednesday.
The ruling marks a big setback for Airbus, but is not the end of its battle with rival Boeing over subsidies in the market for large civil aircraft worth $3 trillion over the next 20 years.
Boeing hailed the WTO ruling, which did not back all U.S. claims, saying it proved that Airbus had only been able to take market share from Boeing -- nudging it out of number one place in the process -- because of subsidies.
"It has struck at the heart of subsidies for Airbus, held that they are illegal, and must end forthwith," Boeing general counsel J. Michael Luttig told Reuters.
Airbus said the funding system itself, based on government loans to be paid back as planes are sold, had not been faulted.
The WTO said the prohibited subsidies should be halted immediately and said this meant 90 days; but the legal process could mean months or years before this deadline is reached.
The European Commission said it would decide shortly whether to appeal and voiced disappointment over the WTO findings against most loans for the A380, the world's largest airliner.
"The EU remains committed to a negotiated outcome to the dispute with no-preconditions on either side," European Union Trade Commissioner Karel De Gucht said.
A first confidential report in a countersuit brought by the EU against U.S. support for Boeing is expected on July 16.
The case did not cover Airbus's new A350 airliner, but Boeing said the ruling would prevent European governments from paying similar loans to develop that plane. Airbus denied this and said it would press ahead with talks on setting up loans.
The ruling comes as both Boeing and Airbus parent EADS prepare to submit bids by July 9 for a contract worth up to $50 billion for a new tanker for the U.S. Air Force.
The EADS offering is based on the Airbus A330 -- one of the planes found to have been unfairly subsidised -- and Boeing is already making much of this, although it remains to be seen to what extent this will sway the Pentagon.
The WTO panel also told the EU to withdraw other subsidies or end their adverse effects on the United States, but did not uphold all the U.S. complaints.