VANCOUVER — The spectre of a wider trade war with the United States grew Tuesday after the federal government suspended negotiations to settle the softwood lumber dispute because of a U.S. refusal to abide by a NAFTA ruling that sided with Canada.

The two sides were expected to meet in Ottawa on Monday but Trade Minister Jim Peterson said he put those talks on hold after consulting with lumber-producing provinces and the forest industry.

An industry source said the push is on to get Prime Minister Paul Martin to speak directly with President George W. Bush before the dispute damages the two countries' trading relationship, the biggest in the world and largely hassle-free.

Peterson said in a statement he informed U.S. Trade Representative Rob Portman, his American counterpart, of the decision.

"I have conveyed Canada's position to Mr. Portman ... and appreciate our open dialogue," said Peterson.

Portman's spokeswoman, Neena Moorjani, said the U.S. government was disappointed and hoped talks would resume shortly.

"As Ambassador Portman has noted, we continue to believe it is in the interest of the United States and Canada to reach a permanent, market-based negotiated solution and had been preparing for these talks with this goal very much in mind," Moorjani said from Washington.

In a prepared statement, she reiterated the U.S. view it is not flouting its NAFTA obligations. U.S. trade officials argue a move last fall to comply with a World Trade Organization ruling on softwood duties rendered last week's ruling by a NAFTA extraordinary challenge committee moot.

The Canadians claim the Americans are hiding behind a legal technicality to avoid cancelling punitive tariffs on Canadian lumber and returning more than $5 billion in duties collected since May 2002, with interest.

B.C. Forests Minister Rich Coleman, whose province accounts for more than half of lumber exports to the United States, said scraping the duties and returning the money would renew confidence in a negotiated settlement.

"Until we see some good-faith measure from the United States there's not really much point in our people going to the table to see if there's a possibility of a deal," he said.

The U.S. decision represents a fundamental breach of faith, said Gordon Ritchie, who helped negotiate the 1988 Canada-U.S. Free Trade Agreement, whose dispute-resolution mechanism carried over into NAFTA.

"I certainly support suspending the discussions," Ritchie, brought in to help with the lumber talks, said from Ottawa.

"There's no way that I can sit across the table from somebody whose main bargaining leverage is that he isn't complying with the existing agreement. That has to be cleared up first."

The extraordinary challenge committee is NAFTA's court of last resort. The U.S. had demanded it review NAFTA appeal decisions that found Canadian softwood imports posed no threat of injury to American producers.

The panel -- two Canadians and an American -- last week unanimously upheld the earlier rulings, which under the treaty carry the force of law.

"We're not talking about some trivial violation," said Ritchie.

"If they don't obey the ECC they're in violation of their own law," said Carl Grenier of the Montreal-based Free Trade Lumber Council. "Perhaps that's not really dawned on them yet."

Barring an American climb-down, Canada will have to decide what its next step will be, said John Allan, president of the B.C. Lumber Trade Council.

"There's been reference to retaliation; I see linkage (with other trade issues) is coming back onto the table," he said, referring to NDP Leader Jack Layton's suggestion Monday that Canada slap an export tax on oil and gas shipments.

"I think the federal government's going to have to take time to think through what they can do and what they should do."

Under NAFTA, Ottawa can apply for retaliatory duties on a range of U.S. imports and last year set the wheels in motion to retaliate under WTO rules potentially against billions of dollars in U.S. goods.

But a spokesman for the American lumber industry claimed the Canadians used U.S. response to the NAFTA ruling as a pretext to pull out of the talks.

"I don't think the Canadian provinces and the industry within those provinces are able to come to a consensus on how to deal with the issue," Barry Cullen, executive-director of the Coalition for Fair Lumber Imports, said from Washington. "I think that's the fundamental problem."

Cullen said the Americans were expecting the Canadians to table a response to a U.S. proposal for a temporary export tax to replace lumber duties while the provinces implement open-market reforms to their forest policies.

The Americans were also looking for a limits on exports of lumber from dead stands of pine beetle-infested timber in the B.C. Interior, which must be logged before it rots. Quotas are a non-starter with the Canadians.

Canada exports about $10 billion a year in spruce, pine and fir lumber a year to the U.S. home-construction and renovation sectors, comprising about a third of the American market.

U.S. producers have claimed for decades Canadian exports are subsidized by low Crown timber-cutting fees and other policies, launching four trade actions since the early 1980s.

A five-year quota deal created an uneasy truce in the late 1990s, which evaporated when the agreement expired in 2001.

The United States collects about $100 million a month in lumber duties, money it claims it does not have to return even if Canada ultimately wins its trade challenges.

Incentive to reach a settlement diminished in the last couple of years as a red-hot U.S. housing market drove up lumber prices.

A downturn would increase pressure on both sides to cut a deal, more so on the American industry whose mills are far less productive at low lumber prices than their Canadian counterparts.

The U.S. lumber coalition argues provincial forest policies help give the Canadian industry that edge.