WASHINGTON - An international trade panel on Wednesday rejected Canada's claim that the United States had no basis to impose tariffs on softwood lumber used to build homes, but said the duties may be too high.

The panel of three American and two Canadian judges, set up under the North American Free Trade Agreement to deal with trade disputes, upheld U.S. claims that Canada subsidizes its timber industry and therefore is subject to tariffs.

The legally binding ruling means the Commerce Department must recalculate - and likely reduce - the tariffs within 60 days. The decision also could put pressure on Canada to reform its timber industry and move toward a more market-based system.

A Commerce official, speaking on condition of anonymity, said the United States prevailed on the key issue of whether Canadian lumber is subject to U.S. tariffs.

"We hope that the resolution of this fundamental issue will encourage the process of market reforms in Canadian" timber practices, the official said.

Canada's international trade minister, Pierre Pettigrew, applauded the decision, which he predicted would result in lower duties for Canadian lumber. He even held out hope that the United States eventually would eliminate the duties.

"We think that if we have an honest method in keeping with American law, the countervailing duty should be zero," he said.

Experts do not believe that will happen, saying the ruling will more likely send U.S. and Canadian negotiators back to the bargaining table to work out a compromise.

Deborah Burns, vice president of the Southeastern Lumber Manufacturers Association, a U.S. industry group, said the ruling should send a strong signal to Canadian leaders: "End the subsidies now," she said.

Softwood lumber from pine, spruce and other trees is commonly used in home construction. The United States imported nearly $6 billion of such lumber from Canada in 2002, about one-third of the American market.

U.S. lumber producers say they are losing sales and jobs because Canada subsidizes its softwood industry by charging artificially low fees to log public lands. The Canadians argue that their lumber is cheaper for a variety of reasons, including production efficiency.

The long-running dispute boiled over last year when the United States imposed tariffs averaging 27 percent on softwood imports from four Canadian provinces.

Canada complained to the World Trade Organization that the tariffs have cost Canadian lumber companies hundreds of millions of dollars and eliminated thousands of jobs.