Simulating a leak in the air-conditioning line of a Mercedes B-Class tourer, they had released a fine mixture of refrigerant and A/C compressor oil, which sprayed across the car's turbo-charged 1.6 liter engine.

The substance caught fire as soon as it hit the hot surface, releasing a toxic, corrosive gas as it burned. The car's windshield turned milky white as lethal hydrogen fluoride began eating its way into the glass.

"We were frozen in shock, I am not going to deny it. We needed a day to comprehend what we had just seen," said Stefan Geyer, a senior Daimler engineer who ran the tests.

Air-conditioning refrigerants are not the stuff of controversy. Traditionally, they have been made of relatively innocuous chemicals that change from liquid to vapor and back again, transferring heat and cooling the surrounding air in the process.

But the discovery at the German carmaker's Sindelfingen test track in early August suggested this new product posed a very real risk to car passengers.

It has set off a battle royal between Daimler and U.S. conglomerate Honeywell (HON.N), replete with mudslinging, conspiracy theories and spin-doctoring.

At stake is not just a lucrative business for Honeywell and its partner Dupont (DD.N), who have invested hundreds of millions of dollars to develop, market and produce the coolant known as HFO-1234yf. Their refrigerant also happens to be the only product of its kind that meets new EU climate guidelines.

Because of concerns about greenhouse gases, EU legislators in Brussels have ordered the phasing out of the long-time industry standard, R134a, from January.

By 2017, every single air-conditioned car that rolls off assembly lines for sale in Europe - roughly 14 million vehicles a year - could be filled with about $70 worth of HFO-1234yf.

The Daimler test has sent the industry, and Brussels, scrambling to figure out whether years of tests that showed the new product to be perfectly safe could have been flawed.

If it does pose a danger, they must reconsider plans to introduce the refrigerant across Europe's entire fleet - and act fast.

"The industry obviously takes very seriously the new findings, which show the refrigerant can be flammable under certain extreme conditions," said Cara McLaughlin, a spokeswoman for Europe's auto industry association ACEA.

DAMAGE CONTROL

After confirming their August results in subsequent tests, Daimler notified the authorities in late September that it wanted to recall all 1,300 cars worldwide that already use the new refrigerant.

A month later, with only a few weeks to go until the phase-in of HFO-1234yf begins, 13 major carmakers quietly began a new fourth round of safety tests to assess the accuracy of the Daimler results, which showed combustion occurring in more than two-thirds of the cases after a simulated head-on collision.

Meanwhile, Honeywell and Dupont are in full-blown damage control mode.

They stand to lose a fortune in wasted development costs and forfeited future revenue. Honeywell alone has secured over 100 patents for the product worldwide.

The companies say the simulations were not conducted under real-life conditions and note that cars that were actually crashed to test the material - rather than subject to simulated accidents - did not raise any red flags.

They accuse Daimler of grossly exaggerating the danger and even of deliberately staging the test to provoke a scare out of ulterior motives that have nothing to do with passenger safety - a claim the Stuttgart-based carmaker vehemently denies.

Geyer's findings were so diametrically at odds with previously documented research that even German engineers at an automotive icon like Mercedes started to doubt themselves.

"It was scarcely believable. The most complicated lab tests conducted using the most sensitive measuring instruments around found nothing and all we do is drive a car around a couple of times, open a tiny hole in the refrigerant line and the next thing you know the car is on fire," said Geyer.

Had he seen a February 2008 report by a small Austrian firm, Obrist Engineering, he might have known that combustion could occur at engine operating temperatures.

Obrist identified a risk of secondary fire and urged further investigation to assess the implications for passengers, citing the relatively low concentrations of toxic emissions needed to kill a human being.

Andreas Kornath, a chemistry professor at the University of Munich who works with fire fighters, has been warning carmakers about HFO-1234yf and the risks posed by even low amounts of hydrogen fluoride (HF) released during its combustion.

"Whereas carbon monoxide does no permanent tissue damage and during a fire rises straight into the atmosphere, HF binds with ambient moisture to form very fine droplets of hydrofluoric acid that can remain suspended in the air," he said.

Readily absorbed by the skin, hydrogen fluoride begins attacking the body once it enters the bloodstream by spreading death on a cellular level, a process known as necrosis. High enough doses are known to cause the lungs to fill up with fluid, causing a drowning sensation, and to trigger cardiac arrest.

According to the U.S. Labor Department's Occupation Safety and Health Administration, workers should not be exposed over an eight-hour period to more than three milligrams of hydrogen fluoride per cubic meter of air, or three parts per million.

Permissible levels for hydrogen cyanide - used by the Nazis in gas chambers - are over three times as high.

AIRBAGS MORE DANGEROUS

After already suffering a nine-month production delay in China, the last thing Honeywell and Dupont need now is a potential safety scandal that could have ramifications for their business in Europe and beyond.

Thanks to incentives offered by the Environmental Protection Agency, the refrigerant is likely to be rolled out widely in the United States as well.

The duo's patent-protected monopoly has aroused suspicion by carmakers and envy at other rivals. Europe's ACEA believes Honeywell intentionally concealed its patent process, a claim the company rejects as baseless.

French chemical company Arkema (AKE.PA) prompted the EU to launch anti-trust investigations last December. Honeywell is being examined over whether it "abused its dominant position" and "engaged in deceptive conduct".

While Honeywell and Dupont concede that HFO1234yf is "mildly flammable", they point to peer-reviewed safety tests from December 2009 that estimate the refrigerant could pose a danger in just one or two cases per year.

"The chance of being killed by an inflating airbag is 100 times higher," said Chris Seeton, an engineer from Honeywell leading the development of HFO-1234yf.

With much on the line and environmental groups in Germany advocating the industry focus on developing carbon dioxide as a natural refrigerant, things are turning ugly.

Honeywell accuses Daimler of designing the test in such a way as to create the desired result, all the way down to the amount of refrigerant found in the A/C system.

"We fundamentally believe they knew what they were doing when they went to videotape this," said Honeywell's Seeton. "Their test was engineered for that outcome."

By fomenting a fear campaign, his company says, Daimler might be seeking to postpone as long as possible paying the higher costs of the new refrigerant, which they say is ten times as expensive as R134a.

"It wasn't until they were under significant economic constraints and this billion-euro cost savings (program was launched) that they brought this issue up," said Terrence Hahn, General Manager for Honeywell's Fluorine Products business.

Seeton also believes Daimler might be using safety as an argument to test the EU's resolve, given German carmakers are seeking greater allowance to build cars with dirtier emissions than permitted under current 2020 targets.

Daimler dismisses the claims. It says it now faces higher costs from ditching the new refrigerant.

"GUARANTEED NOT TO BURN"

Michel Gabriel, managing director of consultancy Interbrand in Zurich, believes Daimler is justified in taking a cautious stance, given its reputation for producing cars with the highest levels of safety.

"In cases where management is aware of a certain problem and knowingly acts anyway, judging a risk to be acceptable, then they might make themselves liable to the accusation that they had acted irresponsibly," he said. "A premium carmaker's most important asset is its brand."

The German carmaker won over its first supporter in November in the form of Volkswagen (VOWG_p.DE). Its chairman, Ferdinand Piech, said the group would work on developing a new A/C system using CO2, since it is "guaranteed not to burn".

Brussels has not received any formal request to delay enforcement of the EU directive yet, but the German auto industry wants six additional months to conduct more tests.

"Daimler has raised the highest concern in the European Commission," said a spokeswoman, adding Brussels is "closely following the developments in the relevant investigations".

One industry source believes the EU has no choice but to push back the January phase-in of HFO-1234yf, since every carmaker has been caught unprepared. Launching infringement proceedings against the carmakers is a political no-go at a time when the auto industry has its back against the wall.

"Just look at Peugeot, Ford or Opel; piling on fines would break their neck," the person said. "There is no alternative to finding a new refrigerant, given the current debate. The Mercedes recall signaled that very clearly."

(Writing by Christiaan Hetzner; Editing by Noah Barkin and Will Waterman)

• A Permanent Economic Emergency