The unfair subsidies included at least $2.6 billion in assistance from space agency NASA, which the WTO's appellate body agreed had allowed the U.S. company to launch its modern 787 Dreamliner, causing "serious prejudice" to Airbus.

The ruling is the latest step in a seven-year dispute involving mutual claims of aid for the world's dominant planemakers and could theoretically lead to retaliation on both sides once the Geneva trade body's procedures are exhausted.

The WTO has already ruled that Airbus received illegal aid through a system of European government loans but the two sides cannot agree on the scope or impact of that ruling.

Most observers expect the United States and the European Union will eventually negotiate a settlement to end the row, but warn it could rumble on for years amid further bickering.

"We are ready to discuss at any moment, provided we are discussing on the basis of good questions," EU Trade Commissioner Karel de Gucht told a news conference in Geneva.

The EU says it complied with WTO findings against Airbus last December, but the United States questions this and is about to go back to WTO compliance referees while threatening to hit the European Union with sanctions worth $7-10 billion.

The United States will have six months to comply with the latest ruling once the WTO has formally adopted it, which it is expected to do at a meeting on March 23.

INTERPRETATIONS

As so often in a saga with implications for jobs and investment on both sides of the Atlantic, both sides gave their own interpretations as soon as the 598-page report came out.

The United States acknowledged that Boeing had been found to receive between $3 billion and $4 billion in subsidies in the form of federal research grants and local tax breaks, which is more than the $2.7 billion it conceded originally.

But U.S. Trade Representative Ron Kirk called the decision "a tremendous victory" for the United States because according to Washington's calculations the WTO had previously found that European governments gave $18 billion in aid to Airbus.

"It is now clear that European subsidies to Airbus are far larger - by multiples - and far more distortive than anything that the United States does for Boeing," Kirk said.

Tim Reif, general counsel for Kirk's office, said the WTO had found Boeing lost 342 aircraft sales because of unfair subsidies to Airbus, while Airbus lost 118 sales because of unfair subsidies to Boeing.

"Any way of slicing it, it's pretty clear," he said.

De Gucht said the two cases were fundamentally different: "When you're discussing about Airbus you're discussing about repayable launch investments where the distorting element are the interest rates, whereas in the United States' case, the Boeing case, it's about grants, it's about cash gifts.

"The costs to EU industry from these long-term subsidies run into billions of euros. The U.S. should now put an end to such harmful subsidies," he said in a statement.

The biggest trade dogfight at the WTO has already lasted longer than the Uruguay Round negotiations that led to the birth in 1995 of the world trade body, designed to bring order to the global trading system and roll back protectionism.

"I think we're stuck. When you have this kind of WTO trade gridlock, one of two things can happen: One is both sides claim victory and walk away, the other is both sides claim victory and start fighting," aerospace analyst Richard Aboulafia said.

The WTO panel originally found that Boeing received at least $5.3 billion in subsidies including $2.2 billion in tax breaks through a defunct system of offshore corporations.

WTO judges reversed part of a finding that criticized some federal and state tax breaks but according to European sources maintained its core finding that the federal aid should be withdrawn. U.S. officials insist this has already happened.

The WTO strengthened a finding that Boeing got almost $500 million in subsidies through bonds issued by Wichita, Kansas.

Boeing officials said that what the company had lost, by seeing the amount of illegal subsidies revised upwards, had been offset by reductions in the amount of harm caused to Airbus, which they said had been reduced sharply in the appeal.

The amount of harm will be important later when regulators try to assess how much, if any, retaliation is justified.

EADS subsidiary Airbus insisted the amount of damage identified by the WTO remained as high as ever and said it had lost $45 billion in sales due to Boeing subsidies.

(Additional by Sebastian Moffett, Doug Palmer; Editing by Michael Roddy)

• A Permanent Economic Emergency