* WTO court rejects U.S. appeal in anti-dumping case
* Another blow to U.S. efforts to allow "zeroing"
* Ruling opens way for Japan to seek sanctions
* U.S. faces internal pressure to continue "zeroing" (Adds comments from U.S. economist; adds Washington dateline)
By Jonathan Lynn and Roberta Rampton
GENEVA/WASHINGTON, Aug 18 (Reuters) - The World Trade Organization's top court rejected on Tuesday a U.S. appeal in a long-running case on anti-dumping measures, clearing the way for Japan to threaten trade sanctions against Washington.
The final ruling by the WTO's Appellate Body in the case -- launched by Japan in 2004 over U.S. measures dating back to 1999 -- dealt another setback to a controversial U.S. method of tackling unfairly priced imports.
"The Appellate Body has upheld our position," said a Japanese diplomat who asked not to be identified. "Basically, I think we won."
The U.S. Trade Representative is "deeply disappointed" in the ruling and will consult with Congress and the public about what to do next, USTR spokeswoman Nefeterius McPherson said.
"The findings appear to take a sweeping approach to compliance proceedings that is beyond anything agreed by (WTO) members," McPherson said.
Japan had sought leave to impose up to $248.5 million in annual sanctions against the United States for what it argued were unfair U.S. duties on imports of Japanese ball-bearings.
The United States objected to that amount and the question went to arbitration. The two sides then asked for arbitration to be suspended while the WTO examined whether or not the United States had complied with the original ruling.
Tuesday's Appellate Body decision upheld that original decision, ruling against the United States on every count.
MORE ARBITRATION IN STORE
Once the WTO adopts the Appellate Body findings and April's ruling, which it is likely to do at the next meeting of its Dispute Settlement Body on Aug. 31, the arbitration process on the size of Japan's retaliation can resume.
The case turned on a controversial method known as "zeroing" used by the United States to calculate duties on goods that have been imported for less than they cost at home.
WTO members other than the United States say that zeroing can lead to higher anti-dumping duties than are justified.
The way the United States handles its anti-dumping measures was also an issue. Washington argued it could continue to levy duties on goods imported before a WTO ruling finding such duties illegal -- a stance rejected by the court.
The United States is the only one of the WTO's 153 members to back zeroing. Altogether, various WTO bodies have condemned zeroing about 20 times.
If Japan moves to apply trade sanctions, the U.S. administration likely would make small changes to try to stall retaliation, which could force more WTO litigation, said Thomas Prusa, a trade economist at Rutgers University.
"It's not clear by any means that the United States is actually really willing to stop doing zeroing," Prusa said, explaining Congress backs the method, which helps protect U.S. steelmakers.
"I think everyone would like the zeroing problem to go away. The question is, does the United States actually have the kind of political courage right now to stand up to a fairly small number of U.S. industries?"
The Obama administration could try to use zeroing as a bargaining chip at WTO talks, using gains to convince Congress to accept reforms to the practice, he said.
Japan is spearheading resistance to zeroing in the current Doha round of negotiations on a new global trade pact.
The new WTO Appellate Body decision also highlights overall sensitivity about "anti-dumping" measures, which impose duties on imports that are dumped, or sold for less than they cost at home, but which can be abused for protectionist purposes.
There is growing concern that countries are increasing their use of anti-dumping duties to keep out competitive imports to protect industries amid the financial crisis.
In a report on protectionism last month, WTO Director-General Pascal Lamy said the number of anti-dumping investigations by WTO members had risen in 2008 to 209, an increase of 28 percent over the previous year, and forecast a bigger increase in future than in previous economic downturns. (Editing by Stephanie Nebehay and Cynthia Osterman)