Lord Mandelson has tried to head off a transatlantic trade war by expressing concern at Washington’s handling of a $35 billion Pentagon procurement project that could spark European retaliation.

At the centre of the row are allegations made by EADS that the Pentagon has skewed the terms of a competitive tender to favour Boeing.

EADS, the owner of Airbus, and its American partner Northrop Grumman said on Monday night that they were pulling out of the race to build air refuelling tankers for the US Air Force.

It is understood that the Business Secretary has written to the White House to articulate his concerns. Whitehall insiders told The Times last night that the handling of the tanker contract had sent the wrong signal.

One said: “It is inevitable that there will be pressure on European governments to retaliate, but that really can’t be the way forward. The last thing we want is a tit-for-tat fight across the Atlantic.”

Lord Mandelson is also understood to be angry that EADS has been forced to throw in the towel as the UK would have been a big beneficiary had it won the contract. The deal could have been worth £4.6 billion in export orders and helped to secure 5,000 jobs at the Airbus factory in Broughton, North Wales, which would have built the tanker’s wings.

When the tanker contract was first opened for bidding in 2007, EADS-Northrop offered the Airbus A330 while Boeing offered the smaller 767. The European aircraft won but Boeing protested and, after intense lobbying by the American company’s supporters in Congress, the deal was overturned on technicalities. When the Pentagon reissued the terms of the contract it had been changed to favour a smaller plane and EADS-Northrop felt that they could not compete.

This sparked anger in Europe yesterday, with Germany’s Economy Minister saying that the situation had signs of protectionism. The European Commission pointedly reminded the United States that the trade imbalance in defence equipment heavily favoured it. In 2008, the US sold $5 billion of defence equipment to Europe while sales in the other direction were $2.2 billion, mostly from the UK. “The European Commission would be extremely concerned if it were to emerge that the terms of tender were such as to inhibit open competition for the contract,” it said. This statement was seen by defence officials as a warning that retaliatory action could be taken by European nations.

Lord Mandelson said yesterday: “Given the open market to US producers we have in Europe, it is very disappointing that a US-led European consortium feels that the revised tanker procurement process is now so biased against them that it is not even worth making a bid.”

The Airbus aircraft has won every tanker competition it has entered against Boeing, including in the UK, which will buy 14 as part of a £13 billion private finance initiative.

Louis Gallois, EADS chief executive, said: “The competition request is now for a smaller, less capable plane and this gives a huge advantage to the 767. What is the consequence of that, the US Air Force will not have the most modern plane in the world.”

The decision to pull out of the US tanker competition came as EADS revealed losses of €763 million (£693 million) for 2009, compared with a profit of €1.57 billion the previous year. It was hit by a €1.8 billion one-off charge for the delayed A400M military transport aircraft and a €240 million provision for production delays with its A380 superjumbo. EADS has lost €4.2 billion on the A400M project but it has agreed a bailout with its partner governments, including Britain, to keep the project going.

The Pentagon’s first attempt to buy new tankers ten years ago ended in scandal when its deal with Boeing was revealed to be corrupt. The company had hired Darleen Druyan, the Pentagon official in charge of the procurement project, after she inflated the price of the planes. She pleaded guilty to corruption and Boeing was fined $615 million.