The U.S. Trade Representative’s Office said yesterday it will ask the World Trade Organization to rule that European government loans to airplane maker Airbus SAS are illegal, setting up the biggest-ever dispute in WTO history.

America said it will file the papers today with the WTO in Geneva to have a panel of judges set up to hear its complaint. The European Union said it was disappointed with the decision and will make its own position known today.

“We would rather not have to go back to the WTO,” U.S. Trade Representative Robert Portman said in a statement issued in Washington. “But the E.U.’s insistence on moving forward with new launch aid is forcing our hand.”

The announcement comes eight months after America filed its initial complaint, saying the government loans to Airbus, called launch aid, provide an unfair subsidy to the European aircraft makers. The E.U. countered with a lawsuit of its own claiming Chicago-based Boeing has benefited from unfair support of as much as $23 billion.

The two governments tried to negotiate a deal without resorting to a WTO panel, agreeing in January to suspend any new aid and to defer litigation until April 11. Those talks broke down in mid-March, with America saying E.U. nations weren’t committed to ending new loans and accusing the 25-nation bloc of trying to change terms of a preliminary agreement.

A WTO case threatens to disrupt financing that Boeing and Airbus – the only two makers of large commercial jets – tap to develop aircraft. The case also escalates tensions between America and Europe, whose $400 billion trade relationship is already marred by disputes over American export tax breaks, E.U. resistance to genetically modified foods, and European customs procedures.

America and the European trade commissioner, Peter Mandelson, released a joint statement minutes after the announcement was made saying the dispute won’t affect broader commercial ties.

A WTO panel will have to decide whether the financing offered to Airbus by European governments constitutes “prohibited” or “actionable” subsidies under global trade rules. In the first instance, a final decision against the E.U., which may take as long as a year, would force the 25-nation bloc to drop its support within 90 days. If WTO arbitrators find the aid “actionable,” the E.U. may open itself to retaliatory sanctions in the form of extra tariffs on its exports to America.

America and the E.U. had been operating under a 1992 accord that spelled out rules governing aid to aircraft makers. America withdrew from the deal in October when it filed its complaint.

Airbus is now working on an A350 jet to undercut Boeing’s planned 250-seat 787 jetliner that will be introduced in 2008. Airbus requested $1.7 billion in government aid to help develop that aircraft, according to Washington, which said that appeal prompted its move to the WTO yesterday.

Toulouse, France-based Airbus sold 320 aircraft last year and had revenue of 20 billion euros ($25 billion), compared with 285 commercial aircraft and $22.4 billion in sales for Boeing.

The E.U. has warned that the trade complaint could cause “mutual assured embarrassment,” and the WTO would likely rule against aid to both companies, according to a European Commission memo that details a September 16 meeting.

The European Commission’s spokeswoman for trade, Claude Veron-Reville, wouldn’t elaborate on the E.U.’s position.