The European Union is dropping its legal challenge to the United States' Helms-Burton Act, which imposes penalties on companies that use or invest in U.S. properties in Cuba that were seized by the Castro government three decades ago.

One provision of the 1996 law even denies entry into the United States to executives of companies that violate it.The decision to let the case before the World Trade Organization lapse is a major step toward defusing a dispute over sanctions that has troubled trans-Atlantic relations for more than two years.

But European and U.S. officials cautioned that they were still far from a final settlement of the dispute and that if talks should break down, the European Union could file a new action.

The European Union was outraged when the Helms-Burton Act was passed and said "secondary boycotts" - that is, boycotts against foreign companies for business they do outside the United States - violate international trade treaties. They brought the case to press their point.

But almost as soon as the papers were filed, both sides acted to avoid a trial. Some European and U.S. officials were afraid that the case could destroy the authority of the fledgling trade court, forcing it to rule on an issue that the United States insisted had to do with national security, not trade barriers.