The US has been ordered to drop a tax break it allows aerospace giant Boeing because it amounts to an unlawful tax subsidy.
The ruling has handed down by the World Trade Organization (WTO) following a complaint from the European Union, where global rival Airbus is based.
The tax cut was provided by the state of Washington in 2013 to ensure that wings for Boeing's new 777X twin-engine passenger jet were made only in this region. The tax break must end within 90 days.
The WTO said the measure by the state of Washington represented a subsidy and was therefore "prohibited" under its rules.
This is only the fifth time in the WTO's history, which was founded in 1995, that it has defined a subsidy as "prohibited".
The ruling is the latest round in a 12-year battle between America's Boeing and Europe's Airbus over government support for the world's two biggest aircraft makers. The WTO order comes as the pace of the battle between Airbus and Boeing shows no sign of slowing down, and indeed the inauguration of Donald Trump as US president in January raises questions over a full-scale trade war in this area.
The WTO found in September that the EU had failed to unwind billions of dollars in unlawful subsidies to Airbus. The ruling could allow the US to impose tariffs on European goods. However, the EU is appealing against these findings.
Next year the WTO will also rule on the EU's claim that the US has equally failed to withdraw billions in illegal support. Boeing said on the current WTO ruling that the order was "a complete victory" for the US firm. It said the EU challenged seven different state tax incentives, but only the US planemaker only fell foul on one.
A complete victory
Boeing said: "In total, the EU claimed that Boeing had received $8.7bn in subsidies. This claim was rejected by the WTO, which found future incentives totalling no more than $50m a year to be impermissible.
"The WTO found that to date Boeing has received no benefit from the 777X rate incentive, and will not until 2020, because the first airplane will not be delivered until then."
Boeing general counsel J Michael Luttig said: "Today's decision is a complete victory for the United States, Washington State and Boeing. The WTO found in September that Airbus has received $22bn in illegal subsidies from the EU and that without these subsidies neither Airbus itself nor any of its airplanes would even exist today."
Luttig added: "The WTO has repeatedly found that Airbus is entirely a creature of government, and they must now bring themselves into compliance with the international laws or risk massive sanctions."
Airbus chief executive Tom Enders said: "The United States and Boeing picked this fight at the WTO, and today's ruling is yet another blow for that strategy. Those prohibited subsidies must be withdrawn immediately following today's historic ruling, meaning that Boeing must give up these massive tax subsidies."
But Enders added that both sides had to sit down and agree a set of rules about how both firms should operate in future.
He said: "I continue to think that the only way out of the ridiculous series of disputes initiated by the US is to agree on a set of globally applicable rules for the support of the civil aircraft industry, which would benefit both sides of the Atlantic."
Analysts said that the one of the reasons these tit-for-tat complaints have lasted for more than a decade is that when one side loses a complaint it can reconstruct the subsidy in a different way, forcing the process to start all over again.