Peter Mandelson, the European Trade Commissioner, may begin an investigation into allegations of American subsidies and dumping in the European biofuels market.

The industry in Europe voted overwhelmingly on Friday to back a formal complaint to the European Commission against a legal loophole that allows American exporters of biodiesel to Europe to qualify for subsidies worth 11p a litre, or $300 a tonne.

The subsidy regime has led to the virtual collapse of Europe’s domestic biofuels industry at a time when governments are eager to support alternatives to fossil fuels.

Mr Mandelson is thought to view the industry’s predicament favourably and could back a formal investigation into the practice, which was adopted by Washington in 2004 as part of a package designed to encourage its domestic biofuels industry.

The European Biodiesel Board (EBB) said that the subsidies have had a perverse effect, sending European imports of biodiesel from the United States soaring from about 100,000 tonnes in 2006 to an expected one million tonnes this year.

Mr Mandelson told The Times that it was an important issue. “We will certainly examine carefully any case put forward by the EBB,” he said.

Elliott Mannis, chief executive of D1 Oils, one of Britain’s biggest biofuel producers, said that the European industry was operating at only 10 per cent of capacity, with many refineries mothballed and several companies close to administration.

“There is just no way that European manufacturers can compete,” he said. Producers in Britain, Germany and Spain have been affected worst. One British company, Biofuels Corporation, has cited American subsidies as a key reason for delisting from AIM in July, owing Barclays about £90 million. In June 2006, Tony Blair visited Biofuels Corporation’s plant at Seal Sands in Middlesbrough to declare the Government’s support for the industry.

The European market for biodiesel, which is produced from vegetable oils and has been touted as a solution to reducing greenhouse emissions, grew by 40 per cent last year to roughly 4.5 million tonnes.

The EBB is taking legal advice and is preparing a formal complaint that will be submitted to the Commission’s trade directorate, led by Mr Mandelson. The Commission is thought to be sympathetic to the EBB’s complaints about unfair subsidies and dumping. It could seek legal action or the imposition of its own countervailing duties to neutralise the impact of the subsidies on European manufacturers.

Under the framework of the American federal measures, biodiesel can be subsidised up to $300 a tonne merely by producers adding a “drop” of mineral diesel to biodiesel.

American producers, therefore, can claim the maximum subsidy for what is known as B99.9 blend, which can then be exported to Europe, where it is also eligible for European subsidy schemes.

Since the benefits are not restricted to biodiesel that is produced and consumed in America, the 2004 changes resulted in a surge of B99.9 exports to the European Union.

In most cases B99.9 blends are sold in the European market as “pure biodiesel” and at a substantial discount of up to €180 (£129) a tonne and in some cases at a lower price than the raw materials purchased by the European industry for producing biodiesel.

Biodiesel breakdown

— Biodiesel, the most commonly used biofuel in Europe, is produced from vegetable oils or fats from plants such as palm oil, corn or jatropha

— The plant oils are mixed with sodium hydroxide and methanol and the chemical reaction produces biodiesel and glycerol

— Biodiesel, which aims to be a carbon neutral fuel, can be used in any diesel engine when mixed with mineral diesel

— The global market for biodiesel is growing and is being encouraged by many governments as an alternative to fossil fuels, but the industry remains controversial because of the pressures it has created between growing crops for fuel versus food, especially in the developing world

— The European market for biodiesel was 4.5 million tonnes in 2006. It grew by about 40 per cent in 2006

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