By Ethan Bilby

LUXEMBOURG (Reuters) - A group of free-trading northern European nations urged the EU's trade chief on Friday to contain a growing dispute with China or risk a negative spiral that could choke exports.

Sweden, Denmark and the Netherlands said EU Trade Commissioner Karel De Gucht needed to find a diplomatic solution with Beijing to avoid a tit-for-tat trade war, after Brussels imposed tariffs on Chinese solar panels and Beijing retaliated with an investigation into European wine.

"It is not the right way to go. When the one side begins to close up, the other continues. And then we have a negative spiral that doesn't stimulate trade," Swedish Trade Minister Ewa Bjorling told reporters at the start of a meeting with De Gucht and fellow EU ministers in Luxembourg.

Britain and Ireland will also press De Gucht on Friday on the issue, their diplomats said.

De Gucht, who handles trade issues for the European Union's 27 countries, went ahead with sanctions against Chinese solar panels on June 6, despite opposition from 18 of the bloc's governments, who fear retaliation from Beijing.

The European Commission, the EU executive, accuses Beijing of dumping billions of euros of solar panels at below the cost of production, unfairly winning 80 percent of the EU market.

However, De Gucht softened his earlier plan to levy punitive tariffs averaging 47 percent immediately, and went ahead with tariffs at 11.8 percent for two months, leaving a window for Brussels and Beijing to reach a negotiated solution.

SUBSIDIES AND THREATS

Still, China responded with a decision to investigate accusations of dumping of EU wine, an apparent attempt to target France and Italy, the two countries most in favor of European tariffs on Chinese solar panels.

"There is still time to resolve this if the Commission and the Chinese move forward on the (solar) issue," Dutch Trade Minister Lilianne Ploumen told Reuters.

EU ministers will discuss the issue over lunch in Luxembourg, and Denmark said it would make it clear it doubted if there was evidence of illegal Chinese trade subsidies.

"We're very much against using trade defense mechanisms unless we can really show there is evidence that they are using subsidies, and we cannot do that," said Danish Trade Minister Pia Olsen Dyhr.

De Gucht has said that China subsidizes "nearly everything" and wants to force Beijing to respect rules set by the World Trade Organization in Geneva. The Commission has also warned China that it is ready to launch an investigation on Chinese telecom equipment manufacturers Huawei and ZTE if they do not negotiate.

China has threatened it could retaliate with further cases against the EU if no negotiated solution is found.

(Writing by Robin Emmott; Editing by Jon Boyle)

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