By Philip Blenkinsop and Robin Emmott
BRUSSELS (Reuters) - The European Union launched an investigation on Thursday into alleged state subsidies for Chinese solar panel manufacturers, intensifying the conflict over the multi-billion dollar solar power equipment market that is straining trade ties.
The EU's executive body is already investigating allegations of Chinese manufacturers "dumping" solar panels in overseas markets, meaning deliberately selling products for less abroad than at home or at less than cost.
It also follows a decision by the United States to impose duties on solar power products from China, although Brussels says its decisions are completely separate from Washington's.
"Industries in the United States and Europe are becoming increasingly aware there is much more evidence of subsidies in China," said an EU official involved in the investigation. "But this is not a purely adversarial process. We have said to the Chinese government that we are open to finding a solution."
The friction comes at a bad time for the economies of both sides with the EU China's biggest trade partner and China the EU's second biggest after the United States.
EU Trade Commissioner Karel De Gucht has complained China subsidizes "nearly everything" but also told Reuters last month that he believed the two sides would avoid a trade war.
The latest subsidy case has been raised following a complaint by the EU ProSun group of 25 European solar panel companies led by Germany's SolarWorld, the same group that had complained of dumping.
EU Prosun says subsidies from Beijing made available only to local firms have stimulated production there to more than 20 times Chinese consumption and close to double global demand.
In a statement on Thursday Prosun said China's state development bank had given 33 billion euros ($42 billion) in cheap credit lines to 12 Chinese solar companies since 2010.
The Chinese government did not immediately respond to the EU decision to go ahead with an investigation but the move comes within a week of China lodging a complaint with the World Trade Organisation accusing Italy and Greece of illegally favoring domestic solar panel producers in promoting new solar power installations and warning it could put tariffs on EU exports of the raw material polysilicon.
Chinese companies sold about 21 billion euros ($27 billion) worth of solar panels and components to the EU in 2011 - about 60 percent of all Chinese exports of the products and some 7 percent of all Chinese exports to the EU.
Chinese producers include Yingli Green Energy, Suntech Power Holdings Co Ltd and Trina Solar Ltd. Trina says Chinese solar companies' cost advantages are due to their high production levels, leading to economies of scale, rather than any state subsidy.
While it produces quantitities of photovoltaic power generation modules totaling over 1000 megawatts, many European manufacturers produce only smaller volumes of several hundred megawatts, it says.
Western solar firms have been at odds with their Chinese counterparts for years, alleging they receive lavish credit lines to offer modules at cheaper prices, while European solar companies, including former industry bellwether Q-Cells, have filed for insolvency.
The United States late on Wednesday gave final approval to duties on billions of dollars of solar-energy products from China for five years, which China has protested against.
"The decision has seriously distorted the situation of the Chinese solar energy industry and the exports of the Chinese solar energy products to the U.S.," China's Chamber of Commerce for Import and Export of Machinery and Electronic Products said, quoted by the official Xinhua news agency.
The European Commission can impose provisional duties within nine months and the EU has within 13 months of an investigation's launch to impose definitive duties for up to five years.
Solar panel anti-subsidy and anti-dumping cases against China are likely to be decided at the same time, within 13 months, unless a compromise is found, the EU official said.
(Additional reporting by Ethan Bilby in Brussels and Kazunori Takada in Beijing; Editing by Greg Mahlich)