Europe and the United States are on the brink of a major trade dispute worth billions of pounds over Washington’s decision to renege on international trade commitments and protect its domestic gambling industry by preventing foreign companies from entering the lucrative market.

The Remote Gambling Association (RGA), whose members include such household names as Labrokes, Skybet, William Hill and Paddy Power, said yesterday that the US action, if unchallenged, could lead to similar protectionist behaviour in other areas.

Clive Hawkswood, the RGA’s chief executive, said: “The US has used an illegal trade barrier. This sets a precedent. If the EU does not act, it could encourage the US to do the same elsewhere.”

The seeds of the dispute were sown earlier this year when the World Trade Organisation ruled that the US had broken its international trade obligations by excluding online Antiguan gaming operators, which at one time had controlled half the US market.

In retaliation, the US unilaterally withdrew its gambling industry from the free trade services commitments it had made under the WTO, effectively ring-fencing the sector from any foreign competition.

The move opened the door for the 150 other WTO members to demand compensation equal to the value of the entire US gambling market. Seven – the EU, Australia, Brazil, Canada India, Japan and Macau – have done so. This would come in improved access for EU companies to other sections of the US services sector.

The European gambling industry, which has the leading internet gaming business with a strong presence in the UK, Ireland, Gibraltar and Malta, puts the value of the concessions at a record USD 100 billion (GBP 49.6 billion).

However, Brussels officials insisted that the sums involved would be lower. “It is almost impossible to quantify in monetary terms, but it would be substantially less than USD 100 billion,” said one.

Washington put forward a compensation offer to the EU on Friday, but Peter Mandelson, the Trade Commissioner, has already rejected it. A Commission spokesman said: “The offer made by the US so far is insufficient. We are continuing to negotiate to secure improvements.”

However, the EU is pursuing a double strategy. On the one hand, it is trying to secure significant concessions for European exporters from Washington after the US became the first WTO member to withdraw from any of its multilateral trade commitments.

On the other, it is following moves in Congress to amend US legislation that could open the market to foreign gaming operators. In April, Barney Frank, the chairman of the House Financial Services Committee, tabled amendments to existing restrictions on the licensing of internet gambling.

The British Government favours opening up the US market. “We would have preferred not to have had the legislation but we feel there is a case for compensation,” an official said.