Mr Bush made his decision just days before a deadline that would have triggered retaliation from the EU, which was preparing to impose sanctions worth $2.2bn (£1.3bn) on US goods ranging from Florida citrus products to Harley Davidson motorbikes.

"These safeguard measures have now achieved their purpose, and as a result of changed economic circumstances, it is time to lift them," Mr Bush said in a statement.

The measures were designed to inflict maximum political pain on Mr Bush, with the EU targeting products from states that would play a crucial role in next year's presidential election. The World Trade Organisation last month ruled the US tariffs illegal and said the EU had the right to retaliate.

In lifting sanctions, however, Mr Bush softened the blow on the domestic steel industry by announcing new measures designed to protect it against unfair foreign competition.

Since the tariffs were imposed, the US steel industry has invested more than $3bn in a restructuring effort. Smaller companies have either gone bankrupt or been absorbed by larger ones. Steel officials say that restructuring would be undermined if the tariffs were lifted, and have accused the EU of trying to blackmail the US.

In the past few weeks, Mr Bush's top political advisers, including his chief political strategist Karl Rove, have been arguing that the tariffs were counterproductive. While the tariffs may have provided marginal help to steel producers, the argument went, they were penalising domestic consumers of foreign steel, such as car manufacturers.

US trade officials pointed to cost cuts, productivity gains and new union contracts as signs of a stronger steel industry since the March 2002 decision to impose tariffs of up to 30%. But lifting the tariffs may cost Mr Bush politically. He narrowly won West Virginia, a Democratic stronghold, in 2000 after promising to look out for steelworkers' interests.

Internationally, the tariffs threatened to unleash a trade war not just with the EU, but also Japan, a prospect that hardly improved the chances of reaping success in the WTO trade talks that stalled in Cancun in September.

The industry has been in a dire state, with too much capacity. That has been a problem for European as well as US companies. Anglo-Dutch firm Corus, for example, has had to lay off thousands of workers. But with the global economy picking up, trade experts say that steel shortages could emerge next year, boosting prices and providing respite for producers in the US and elsewhere.