EU trade chief Pascal Lamy said he was counting on the U.S. administration and congressional leaders to make swift progress on the issue by autumn.
"If there is no sign that compliance is on the way at that time, (the EU) would then start the legislative procedure for the adoption of countermeasures by January 1, 2004," he said in a statement.
The EU was to receive the formal go-ahead from the World Trade Organization later Wednesday for the right to impose sanctions on U.S. imports in retaliation for Washington's failure to change the tax law, which the WTO ruled illegal four years ago.
Potential sanctions were expected to include a wide variety of U.S. exports, including anything from oranges to nuclear reactors. If implemented in full, the sanctions would be the biggest ever.
Sanctions hurt U.S. producers by making it harder for them to sell their products in Europe. But they can also backfire by pushing up prices in Europe or disrupting production if other suppliers can't be found.
In the past, the United States has imposed sanctions against the Europeans, including over rules on banana imports and following an EU ban on hormone-treated beef. However the tax breaks dispute is many times larger and would have a much bigger effect on trans-Atlantic trade.
Lamy said he was optimistic, though, that the Bush administration would move decisively on the issue.
"I also trust that any solution found by the U.S. will be fully compatible with WTO rules," Lamy said.
According to the U.S. Trade Representative, the trade relationship between the United States and European Union is the biggest in the world. In 2002, the American trade deficit with the EU was $82.4 billion, up $21 billion from the year before.
Just last year, the EU slapped restriction on U.S. steel exports because of the Bush administration's decision to place tariffs on European steel, in an effort to protect American jobs.