*Canada, EU Commission encouraged by softened plan
*Germany's Merkel sees Senate vote as a good signal
*WTO's Lamy welcomes changes
*Japan and Australia express concern
*European steelmakers not satisfied
*US supporters confident provision will survive
(Adds comments from U.S. groups)
By Darren Ennis and John McCrank
BRUSSELS/TORONTO, Feb 5 (Reuters) - A U.S. Senate bid to dilute the "Buy American" provision in its $900 billion economic stimulus package was cautiously welcomed on Thursday in Europe and Canada and by the head of the World Trade Organization.
But trading powers opposed to the clause favoring U.S.-made goods remained tight-lipped on whether Wednesday's vote to soften the original language met their concerns and would be enough to avoid a threatened trade war.
European steelmakers said they were not satisfied with the vote in Washington and Japan and Australia also voiced their opposition. Mexican President Felipe Calderon has vowed to fight any U.S. move to introduce protectionist measures in the region as a way to combat the economic slowdown.
The "Buy American" provision passed by the House of Representatives last week required that all public works projects funded by the stimulus package use only U.S.-made iron, steel and manufactured goods.
But under the Senate amendment, the watered-down provision must be "applied in a manner consistent with U.S. obligations under international agreements."
The move was aimed at appeasing the European Union, Canada and other trading partners fearing the loss of lucrative U.S. exports by exempting them from the strict requirement.
'GOOD SIGNAL'
Canadian Trade Minister Stockwell Day told reporters it was "a great step forward" while German Chancellor Angela Merkel said it was "a good signal" by Washington. WTO chief Pascal Lamy, who previously criticized the provision, said he welcomed the latest move.
"But it remains to be seen exactly what legislation comes out (in Washington)," Lamy told reporters in Berlin.
The bill still has to be reconciled with the controversial version passed by the U.S. House of Representatives.
The European Commission, which oversees trade policy for the 27-nation EU, said it was encouraged by the new U.S. stance but like Lamy and Canada, Brussels said it "will have to wait for the final wording" before taking a final position.
The European steel confederation Eurofer said the amendment did not go far enough and it would keep its promise to ask the EU executive to appeal against the U.S. bill at the WTO.
"Unfortunately, the Senate's vote does not go further and overturn the Buy American clause," Eurofer Director General Gordon Moffat said in a statement.
In Washington, supporters of the Senate's Buy American language were confident it would remain in the final stimulus bill and not be watered down further.
"I think what you see in the Senate is what you get," said Scott Paul, executive director of the Alliance for American Manufacturing, whose members include U.S. steel companies that would benefit from restrictive conditions.
Cal Cohen, president of the Emergency Committee for American Trade, a group of U.S.-based corporate chief executives, said the Senate action was a modest improvement but most business groups still want the provision eliminated.
The Buy American plan will boost the cost of public works project, diluting the impact of the stimulus package and creating fewer jobs than otherwise, he said. It also invites other countries to adopt similar provisions in their stimulus plans to the detriment of U.S. exports, he said.
JAPAN, AUSTRALIA WARNING
Earlier on Thursday, Australia warned Washington that any move to protect its iron and steel makers would lead to a trade war, while Japan sent a letter to top aides of U.S. President Barack Obama and the Senate's majority and minority leaders echoing concerns by other U.S. trading partners.
"The common responsibility shared by the two countries, which are the world's No.1 and No.2 economies, is to resist protectionism together," Japan's chief cabinet secretary, Takeo Kawamura, told a news conference.
Japan is the fourth biggest exporter to the United States, after China, Canada and Mexico. Australia is a major iron and steel producer and a strong advocate of free and open trade. Canberra has a free trade agreement with the United States, and last year exported A$484 million ($314 million) worth of steel to the United States.
The deepening global financial crisis and the failure to complete the World Trade Organization's long-running Doha round to free up global commerce, have raised fears that countries will block imports to protect jobs.
China has yet to give any official reaction. (Additional reporting by James Grubel in Canberra, Yoko Kubota in Tokyo, David Graham in Berlin and Doug Palmer in Washington; Writing by Darren Ennis and Sugita Katyal; editing Tim Pearce)