OTTAWA (Reuters) - The United States and Canada faced off on Tuesday in a renewed battle over softwood lumber that threatened to spill over into multiple other sectors, though President Donald Trump said he did not fear a trade war.

Canada vowed to resist Washington’s move on Monday to impose tariffs on lumber that mostly feeds U.S. homebuilding, noting trade authorities have consistently sided with Ottawa in the long-standing dispute.

Prime Minister Justin Trudeau called Trump on Tuesday to reject “the baseless allegations” against Canada’s industry and the “unfair decision” to impose tariffs, said a statement from Trudeau’s office.

“The Prime Minister stressed the government of Canada will vigorously defend the interests of the Canadian softwood lumber industry,” said the statement, which nevertheless added both men agreed that a negotiated settlement was important.

A White House statement said the two leaders had a “very amicable call” about lumber imports and the U.S.-Canada dairy trade.

The heated rhetoric came amid fresh attacks from the U.S. president against Canada’s dairy industry, and just two months after the two leaders held a warm meeting where Trump said the bilateral trade relationship only needed “tweaking.”

“People don’t realize Canada’s been very rough on the United States ... They’ve outsmarted our politicians for years,” Trump said during a meeting with agricultural leaders.

“We don’t want to be taken advantage of by other countries, and that’s stopping and that’s stopping fast,” he added.

Washington said Monday it will impose preliminary anti-subsidy duties averaging 20 percent on imports of Canadian softwood lumber, a move that affects some $5.66 billion worth of imports.

The affected Canadian firms are West Fraser Timber Co Ltd WFT.TO, Canfor Corp CFP.TO, Conifex Timber Inc CFF.TO, Western Forest Products Inc WEF.TO, Interfor Corp IFP.TO and Resolute FP Canada Ltd RFP.N.

Shares in Canadian lumber companies rose as the level of the new tariffs came in at the low end of what investors were expecting. Canada's main stock index .GSPTSE notched a two-month high.

The two countries found themselves on a collision course over lumber -- a subject that has irritated bilateral relations for decades -- after a previous agreement had expired.

In a telephone call earlier in the day with the premiers of Canada’s 10 provinces, Trudeau said Ottawa would use litigation to press its case, a separate statement from his office said.

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Natural Resources Minister Jim Carr said Canada was mulling options such as a World Trade Organization or NAFTA challenge, and would help companies and workers who lose their jobs because of the tariff.

POINTING AT NAFTA

The tensions, which follow comments by Trump about Canada’s “unfair” dairy system, sent the Canadian dollar to a 14-month low as investors braced for tense negotiations with Canada’s largest market.

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U.S. Commerce Secretary Wilbur Ross on Tuesday called Canada a close ally, but said that did not mean Canadians do not have to play by the rules. Ross said that while no immediate further actions were being contemplated, the disputes point to the need to renegotiate the North American Free Trade Agreement sooner rather than later.

Canada’s Carr rejected any suggestion that Canada was not playing by the rules.

“Independent trade panels have repeatedly found these (U.S. lumber) claims to be baseless. We have prevailed in the past, and we will do so again,” he told a news conference.

The two countries and Mexico are preparing to renegotiate the 23-year-old NAFTA.

Canada's share of the U.S. lumber market has ranged from 26 percent to 31.5 percent since 2006, when the countries signed an agreement, down from 34 percent, before that, said Duncan Davies of lumber producer Interfor Corp IFP.TO.

“For us, (U.S. tariffs are) a negative effect on our Canadian business, but the real loser in all of this is the U.S. homebuilder and U.S. consumer ... That’s why we think this is such a misguided effort,” Davies said.

A U.S. homebuilder group called the ruling “shortsighted.”

Canadian Trade Minister Francois-Philippe Champagne, in China to boost sales of softwood lumber, said there had never been a better time to diversify exports.

“There is enormous potential,” he said from Beijing, citing heavy Chinese demand.