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Associated Press | By TOM COHEN, Associated Press Writer

TORONTO (AP) - Canada and the United States are caught in a trade dispute that's no small potatoes for either side: a U.S. ban on spuds from Prince Edward Island is prompting threats of retaliation.

A fungus found in one potato field in the eastern Canadian province led to the virtual U.S. ban on the spuds. Canada this week requested consultations under the North American Free Trade Agreement, escalating the case toward a formal trade dispute.

In the meantime, Canada intends to try to meet a list of U.S. requirements for the transport and import of P.E.I. potatoes, said Terry Norman, the agriculture department's director of Western Hemisphere trade policy. Otherwise, he said, Washington could ban all Canadian potato imports.

"We don't think this is justified, but in order to get the trade going again, we'll try to comply," Norman said Wednesday.

Annual potato exports from Prince Edward Island to the United States totaled $24 million in 1999, barely a statistical blip in U.S.-Canada trade, the world's biggest partnership.

The dispute began when potato wart fungus was found in a field in New Annan on Prince Edward Island in late October. A fungal disease that makes potatoes unmarketable, the wart can be transferred in soil.

Restrictions imposed by the United States after the wart was first detected were partly lifted in mid-December, but still applied to potatoes from a nearly 100,000-acre quarantine zone.

Now a revised set of requirements involving both the export of P.E.I. potatoes to the United States and their transport within Canada has further angered Canadian authorities.

According to the new restrictions sent last week and released Wednesday by the U.S. Department of Agriculture, only one border point, in Houlton, Maine, would accept P.E.I. potatoes. All shipments would be subject to inspection by U.S. agriculture officials and require thorough documentation on their origin.

The restrictions continued the ban on potatoes from the quarantine zone and limited imports from other parts of the 2,250-square-mile island.

In addition, they included processing and documentation requirements for P.E.I. spuds transported within Canada, to prevent potentially infected potatoes from getting repackaged elsewhere and sent to the United States.

A USDA spokeswoman said she was unable to provide information on the reasons for the latest U.S. restrictions, which were determined after a scientific panel studied the situation.

Canadian officials say the United States ignored evidence that the potato wart had yet to turn up outside of the lone field where it was first detected.

In announcing the call for NAFTA talks within 15 days, Agriculture Minister Lyle Vanclief described the U.S. conditions as "unreasonable" and "completely unacceptable." Trade Minister Pierre Pettigrew called them "an unjustified barrier to trade."

Norman said Canada would respond to the U.S. restrictions on Wednesday or Thursday with its own letter that would "basically indicate we're doing most or all of what the U.S. wants, but we're doing it under protest."Associated Press: