VANCOUVER (CP) - The U.S. government signalled its intention Wednesday to appeal last month's ruling by an international trade panel that undercut the justification for punitive American duties on Canadian softwood lumber imports.

The office of the U.S. Trade Representative is expected to formally demand that an extraordinary challenge committee examine a contentious ruling by a North American Free Trade Agreement dispute panel.

Under the NAFTA process's strict protocols, the formal challenge won't be filed until late November. But the U.S. Coalition for Fair Lumber Imports, which speaks for American lumber producers, telegraphed the decision Wednesday.

U.S. trade officials claim the NAFTA panel overstepped its authority in ordering the U.S. International Trade Commission to find Canadian lumber imports posed no threat of injury to U.S. producers.

It intends to ask an extraordinary challenge committee to overturn the panel's finding, which had effectively negated the reasons for imposing countervailing and anti-dumping duties averaging 27.2 per cent.

An extraordinary challenge is the last appeal available on a NAFTA panel ruling, which carries the weight of law in Canada, the United States and Mexico.

A loss there would force the U.S. government to lift the softwood duties imposed more than two years ago and return more than $2.6 billion in duties collected so far.

A decision is not expected until March at the earliest and perhaps as late as May, said John Allan, president of the B.C. Lumber Trade Council.

The move was quickly praised by the lumber coalition, the main U.S. lobby group behind the duties and previous trade complaints against Canadian softwood exporters.

"We applaud and wholeheartedly support this initiative to correct unauthorized, egregiously defective action by the NAFTA panel," coalition chairman Rusty Wood said in a news release.

"We are confident that the judges on the ECC will not accept this aberrant outcome."

The U.S. administration and American lumber industry were upset when, after months of wrangling, the NAFTA panel ordered the commission to find Canadian lumber posed no threat to the U.S. producers.

Canadian softwood exports, worth $10 billion a year, were hit with the duties in May 2002 after the U.S. Commerce Department ruled unrestricted imports of allegedly subsidized lumber could damage the U.S. industry.

The five-member NAFTA panel - three Americans and two Canadians - found unanimously that none of the evidence it received from the trade commission buttressed that argument and ordered the commission to comply with its viewpoint.

"We continue to view the panel's decisions throughout this proceeding as overstepping its authority, violating the NAFTA, seriously departing from fundamental rules of procedure and committing legal error," the commission said in its Sept. 10 acknowledgement.

The U.S. decision to mount an extraordinary challenge was no surprise, said Allan.

"We knew that if the U.S. lost the injury issue at NAFTA they would file such a challenge," he said.

B.C. Forests Minister Mike de Jong, whose province accounts for half of Canada's lumber exports, called the challenge a sign of desperation.

"It delays the inevitable," he said.

Allan said the coalition's premature announcement is in part aimed at regaining "strategic leverage" it lost in wake of a string of adverse rulings on the lumber file and an attempt to panic Canada into coming back to the bargaining table "cap in hand."

Federal Trade Minister Jim Peterson, attending a conference in Vancouver, said Wednesday that Canada will continue its two-track approach - litigation coupled with an open door to negotiating a long-term shift to free trade in lumber.

But he said the Americans have put talks on hold until after the Nov. 2 presidential and congressional elections.

"We must be ready to have a concerted Canadian response, should counteroffers be made," he said.

The U.S. government has the right to file an extraordinary challenge, Peterson said..

"We know that U.S. producers will use every litigation tool available to them in this dispute but Canada will continue to mount a strong case."

The coalition contended all along the NAFTA panel was off base.

On Wednesday it listed several grounds for reversal, claiming the panel ignored U.S. law and that it had no power to order the commission to reverse itself, only to toss back the commission's findings for further review.

The coalition also resurrected allegations an American panel member should have been disqualified because of an ethics violation in connection with a different trade case.

The United States has never won an extraordinary challenge under NAFTA.

But the coalition pointed to wording in an Oct. 7 extraordinary challenge decision involving Canadian magnesium exports that suggest American arguments about the softwood panel's treatment of U.S. law would get a sympathetic hearing.

"We must disagree with their reading of the magnesium decision last week," said Allan.

Canada has always rejected claims softwood lumber is subsidized via low Crown timber-cutting fees and other provincial forestry policies.

The Americans have mounted three previous complaints in the last 20 years. They ultimately proved unsuccessful in trade courts but did crimp lumber exports through voluntary export levies and quotas.

Allan said if Canada wins the challenge, the U.S. should immediately refund the duties - now held in trust by U.S. Customs. But he said the U.S. government has indicated it won't refund duties retroactively.

"We continue to call on our neighbours to uphold the NAFTA decisions - and the rule of law - and to return softwood duties to the Canadian industry," said Peterson.