The ruling means that Brazil could now seek one billion dollars in sanctions until the US stops payments to its farmers. Developing nations, especially in Africa, say the US subsidies lower global prices, squeezing their own poor farmers out of the market.
The US government is estimated to have paid cotton farmers 2 to 4 billion in subsidies in most recent years. However the compliance of the ruling is in doubt since last month the US Congress overturned a veto by President Bush and approved a US$ 290 billion farm bill that maintains many of the cotton payments for the next five years.
US cotton subsidies have become one of the most contentious issues in the WTO Doha round of talks, which seek to open up world trade.
Brazil filed the complaint with the WTO in 2002, alleging that by subsidizing farmers the US had distorted the price of cotton and made it harder for developing nations such as Brazil to compete.
The panel said the US "acts inconsistently with its obligations" as its subsidies for cotton producers are a "significant price suppression" that constitutes "serious prejudice" to Brazil.
The ruling is the first successful challenge to a rich nation's domestic farm policies and agriculture subsidies.
However, US trade officials said they were disappointed with the WTO panel's ruling and rejected Brazil's complaint that the payments distort the global cotton market.
"We believe that the changes made by the United States brought the challenged payments and guarantees into full compliance with the WTO recommendations and rulings in the original cotton dispute," said Sean Spicer, spokesman for the US trade representative.
"There is no basis to say that US payments are today having any impact on cotton prices."
The ruling allows Brazil to seek WTO approval for more than US$ 1 billion a year in sanctions on imports of goods and services from the US. WTO suggested that it could retaliate by suspending US intellectual property rights.
Mercopress