By Alonso Soto
BRASILIA (Reuters) - The United States and Brazil are close to settling a decade-old trade dispute over cotton subsidies, three Brazilian sources close to the talks told Reuters, in what would be the first concrete step to repair ties hurt by an espionage scandal.
Washington is within hours of reaching an agreement with Brazilian cotton producers demanding compensation for cotton subsidies enjoyed by U.S. growers, a senior Brazilian government official said. He asked not to be named because negotiations are ongoing.
"I'm very confident an agreement will be reached on Tuesday," the official said. Two other sources close to the talks also said negotiations were in the final stages.
Relations between the United States and Brazil were strained last year by revelations the National Security Agency spied on President Dilma Rousseff with secret Internet surveillance programs made known in documents leaked by former NSA analyst Edward Snowden.
Diplomatic talks on a wide range of subjects - from double taxation to visas aimed at facilitating business between the Hemisphere's two largest economies - ground to a halt.
Rousseff canceled a state visit to Washington and demanded an apology from President Barack Obama. The United States said publicly it regretted the incident, but has stopped short of issuing a formal apology.
If confirmed, the cotton breakthrough would come just days before Sunday's presidential election in which Rousseff's two main rivals have vowed to rebuild ties with Washington to open markets for exporters in a country hit by recession.
The foreign ministry declined to comment on the state of negotiations. A representative for the agriculture ministry was not immediately available for comment.
In 2004, Brazil won a challenge against U.S. cotton subsidies at the World Trade Organization, giving it the right to impose $830 million in sanctions against U.S. products. Brazil agreed to suspend the penalty if the United States paid into an assistance fund for Brazilian cotton farmers.
The United States stopped paying the monthly compensation in October due to budget disagreements in Congress, prompting the Brazilian government to threaten to slap higher tariffs on U.S. products. The retaliation would have deepened diplomatic tensions between both countries, officials and experts said at the time.
U.S. Vice President Joe Biden traveled to Brazil and met with Rousseff in June in hopes of turning the page on the spying spat. He assured her that Washington has changed the way it conducts electronic surveillance.
In another sign that relations are starting to move forward, Brasilia and Washington signed a tax information exchange pact last week that could lead to a tax treaty to avoid double taxation of U.S. companies operating in Brazil and Brazilian businesses in the United States.
(Reporting by Alonso Soto; Editing by Anthony Boadle and Ken Wills)