European policymakers fear a sharp realignment of the renminbi could cause exchange rate volatility, leading to the dollar weakening further against the euro and other EU currencies.

However, lawmakers in the US want China to act quickly to make its exchange rate system more flexible, helping to increase US exports and cut the trade gap with China which topped $200bn in 2005.

Transatlantic differences over the issue are expected to surface at a meeting of EU finance ministers in Vienna on Friday, at which global economic imbalances will be discussed.

The European Commission, the EU executive, has produced a paper assessing the effects of renminbi revaluation, which says: ¡°China should introduce greater exchange rate flexibility in a gradual manner.¡±

The paper warns that an abrupt de-pegging of the renminbi from the dollar could cause a sudden reversal of capital flows into the US, which might trigger additional downward movement of the dollar against the euro. Such a move would put up the price of European exports to the US, putting at risk one of the drivers of the EU¡¯s economic recovery.

The issue will also be discussed by Asian finance ministers with their EU counterparts in Vienna on Saturday.

A spokeswoman for Joaqu¨ªn Almunia, EU monetary affairs commissioner, played down suggestions of a transatlantic rift, saying the paper was in line with previous statements in which Europe had warned that ¡°volatile exchange rates are not desirable for economic growth¡±.

Europe, like the US, wants China to put in place measures to increase domestic consumption in an effort to reduce global imbalances.

The administration of President George W. Bush is under mounting pressure to take tougher action against China over the value of its currency with the introduction today of legislation that would all but force the US Treasury to brand China as a currency manipulator.

The proposal, drafted by Senator Charles Grassley, chairman of the Senate finance committee, and Max Baucus, the committee¡¯s leading Democrat, would threaten new sanctions against countries found to have ¡°currency misalignments¡± with the US.

If a country was found to have such a misalignment, it would have six months to move towards resolving it.

The US Treasury has angered many lawmakers by refraining from branding China a currency manipulator, and over the Bush administration¡¯s diplomatic efforts to convince Beijing to revalue its currency.