WASHINGTON (Reuters) - A congressional panel turned up the pressure on China over the yuan on Friday, approving a bill that would let the United States slap duties on goods from countries with undervalued currencies.

President Obama gestures alongside China's Premier Wen Jiabao before their bilateral meeting at the United Nations in New York, September 23, 2010. REUTERS/Jason Reed

In a move likely to increase tension with China, the House of Representatives Ways and Means Committee sent the legislation to the full House for a vote next week. It may never become law, however, as it faces uncertain prospects in the Senate.

The vote was a first step to fulfilling long-standing threats to penalize Beijing for keeping its currency artificially weak, which critics claim creates an unfair trade advantage. It came one day after President Barack Obama pressed Chinese Premier Wen Jiabao on the issue in talks on the sidelines of the U.N. General Assembly meeting.

Top administration officials have stepped up criticism of China’s currency practices, and Treasury Secretary Timothy Geithner said last week the issue would be a key agenda item at November’s Group of 20 meeting.

The move came less than six weeks before U.S. congressional elections dominated by concerns over the struggling economy and persistently high unemployment, and some Republicans accused Democrats of forcing a vote now for political gain.

“Playing politics with an issue this serious is risky for American workers,” said Republican Representative Kevin Brady, who added he was worried it could damage U.S. efforts to compete successfully in the growing China market.

Critics inside and outside Congress claim that China has hurt U.S. exports and employment by undervaluing the yuan against the dollar by as much as 25 percent to 40 percent,

Since China’s central bank in June said it would let the yuan fluctuate more freely, it has risen 1.8 percent.

House Ways and Means Committee Chairman Sander Levin, a Democrat, said the bill would give the United States new tools to address China’s “currency manipulation” because diplomatic pressure has not yielded satisfactory results.

‘A DISTORTION’

“China’s persistent manipulation is a major distortion in the international marketplace,” Levin said. China’s undervalued currency “has a major impact on American workers and therefore American jobs. That’s what this is really all about.”

The Obama administration has performed a cautious balancing act over the legislation. Senior U.S. officials have not publicly embraced it but neither have they sought to block it, leaving the door open for lawmakers to press ahead.

“We will carefully examine any proposals put forward by Congress, but we have not taken a position on the legislation,” a Treasury spokesman said after the committee vote.

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There have been expectations that if currency legislation were passed, China would likely challenge the measure at the World Trade Organization, exposing U.S. exports to trade retaliation if Beijing won the case.

By conditioning its ultimate position on how well the bill stacks up with the WTO, the Obama administration left an escape route if it deems the legislation out of line with its diplomatic approach.

In his meeting with Wen, Obama urged China to do more to move its currency toward a market-based exchange rate and Wen said Beijing planned to push ahead with reforms, said Jeffrey Bader, a senior adviser to Obama on Asian issues.

Wen said earlier this week the exchange rate of the yuan against the dollar is not the main reason for the U.S. trade deficit with China.

Levin told Reuters Insider he expected the House to pass the legislation on Wednesday. The Senate, which has competing proposals and a requirement for a 60-vote supermajority on controversial issues, has not made a commitment to bring up the issue before it adjourns for the year.

In the foreign exchange markets, the panel’s approval of the measure drew little reaction.

“It will not have too much impact on currency markets,” said John Doyle, senior currency strategist at Tempus Consulting in Washington. “It’s more rhetorical.”

The bill amends U.S. trade law to essentially allow the U.S. Commerce Department to treat an undervalued currency as an export subsidy if certain criteria are met.

The change adds a new subsidy -- persistent and fundamental currency undervaluation -- to the list of subsidies the U.S. Commerce Department can already offset with “countervailing duties.”

Ways and Means Committee aides said the bill does not guarantee the Commerce Department will apply countervailing duties against undervalued currencies, but removes an important hurdle.

Under the bill, the Commerce Department would have to decide the precise amount of any undervaluation when presented a case. Commerce Department officials estimate that currently less than 3 percent of U.S. imports from China are hit with either countervailing or anti-dumping duties.

That number is expected to rise if the “Currency Reform for Fair Trade” becomes law because the promise of potentially higher duties could encourage more U.S. companies to bear the cost of trade litigation to seek import relief.