Canada's on-going battle over softwood lumber has dealt what appears to be a serious setback.

The World Trade Organization has ruled that the United States did comply with international law when it imposed billions of dollars of duties on Canadian lumber.

The confidential ruling, which Canadian officials confirmed with The Globe and Mail, adds to the complex web of legal decisions in the on-going trade feud between Canada and the U.S.

The U.S. will likely see the ruling as a vindication for when, in 2004, it issued a revised finding that Canadian softwood lumber imports threatened U.S. mills.

Federal Trade Minister Jim Peterson says he's "disappointed" with the WTO's decision, but adds that it won't change Ottawa's plans to keep fighting in the courts.

Peterson says Ottawa is still considering retaliation against Washington with possible trade sanctions against U.S. exports to Canada.

British Columbia Forests Minister Rich Coleman, meanwhile, calls the WTO ruling only a small setback, and points out that it's an interim decision which will most likely be appealed.

Coleman also says that Canada has always felt the stronger part of the softwood case was to be made under the North American Free Trade Agreement.

The WTO ruling contradicts findings from a NAFTA panel that ruled earlier this month that the U.S. had no legitimate reason to impose duties on Canadian softwood.

The panel found the U.S. duties, which now total more than $4-billion, illegal under U.S. law, prompting Ottawa to call for their immediate removal.

But Washington declared it would ignore the NAFTA ruling. It claimed the duties are justified since Canada's official grievance was made redundant last fall, when the U.S. moved to comply with a World Trade Organization ruling on softwood duties.

At a meeting of New England governors and Eastern Canadian premiers on Monday, Frank McKenna, Canada's ambassador to the United States, said the rules governing the largest commercial relationship in the world were not being respected.

"You can't carry out your appeal all the way to conclusion and then say when you lose, 'Well, that doesn't count,' " Mr. McKenna told reporters.

David Wilkins, U.S. ambassador to Canada, pledged to change his tone after complaining last week about the "emotional tirades" of Canadian politicians.

"I truly believe we all have a responsibility to keep the rhetoric down and get back to the negotiating table," Wilkins told the conference in St. John's.

Toronto trade lawyer Lawrence Herman said the WTO and NAFTA rulings aren't so much contradictory as "mutually exclusive."

NAFTA panels determine whether a country is complying with its own laws, while WTO panels check adherence to international trade laws, he told The Globe.

The WTO ruling is still confidential and won't be made public until later this year.

The dispute has marred the largest trade relationship in the world. Just last week Canada threatened to impose retaliatory tariffs in the latest escalation in the four-year dispute over the $7.5 billion of softwood lumber Canada exports annually to the U.S., its largest trading partner.

In all, about 80 percent of Canada's C$385 billion in exports last year were to the U.S.