GENEVA: European Union subsidies for sugar production are illegal, the World Trade Organisation (WTO) confirmed in a ruling that could affect controversial reform plans in the 25 nation bloc.

The organisation's appellate body rejected an EU appeal in a dispute pitting Brussels against Australia, Brazil and Thailand.

The WTO disputes settlement body (DSB) ruled last October that the EU's subsidised exports had been exceeding an agreed 1,273,000-tonne-a year limit since 1995, by almost five times.

Yesterday's ruling reaffirmed that the EU was breaching accords on global commerce and should fall into line.

Australia's ambassador to the WTO in Geneva, David Spencer, welcomed the decision and said it had clearly established that the EU was not complying with world trade rules.

In Brussels the European Union said it regretted the ruling but pledged to respect the finding.

"We will abide by our international obligations on the sugar regime and will work closely with member states on the necessary reforms ahead of the WTO Ministerial in December," EU trade commissioner Peter Mandelson said.

Added EU agriculture commissioner Mariann Fischer Boel: "We presented our case forcefully and I had hoped that the appellate body would take greater account of our arguments." The 148-nation WTO oversees compliance with the rules of world trade.

Its specialised panels rule on disputes among its members, with WTO regulations authorising sanctions against those who fail to conform with its decisions.

Yesterday's ruling will feed into a debate on how to shake up the EU's farm trade.

Boel said would "naturally ... take account of this verdict when I finalise the reform proposals we are due to publish on June 22."

Ten EU countries last November objected to the European Commission's plans to overhaul sugar production and support, which was partly designed to adapt it to the changing face of global trade.

Brazil, one of the world's largest sugar producers and exporters, along with Australia and Thailand, had argued in their complaint in August 2003 that subsidies in the European bloc severely distorted the world sugar market.

The EU's current reform plans involve a progressive reduction by one-third of guaranteed prices for European farmers by the end of 2007 and a cut in production quotas. Development campaigners also welcomed the WTO decision, saying it could give a boost to farmers in poor nations who are undercut by subsidised exports from rich countries.