UPDATE 3-EU gives China two months to resolve solar panel row
* Initial duty of 11.8 pct to take effect on Thursday
* Commission says aim is negotiate a settlement with China
* Duties would rise to an average of 47.6 pct by Aug. 6
* EU trade chief says EU wants to avoid trade war with China
* EU producers: China has captured 80 pct of solar panel market
By Robin Emmott and Ethan Bilby
BRUSSELS, June 4 (Reuters) - The European Union is to impose duties on imports of Chinese solar panels from Thursday, but announced a dramatically reduced initial rate after pressure from some large member states in the hope of reaching a negotiated settlement with Beijing.
The EU says it has evidence that Chinese firms are selling their goods below cost - a practice known as dumping. But the initial duty of 11.8 percent announced on Tuesday by European Trade Commissioner Karel De Gucht was far below the average 47 percent that had been planned.
The shift reflects the desire to avoid a trade war, while also acknowledging opposition to duties from 18 of the EU's 27 member states, led by Germany and Britain.
While the European Commission has the final say on trade issues, it does not want to be seen to be acting against the interests of member states.
"This is a one-time offer to the Chinese side, providing a very clear incentive to negotiate," De Gucht told a news conference. "It provides a clear window of opportunity for negotiations, but the ball is now in China's court."
One Chinese source close to the talks said: "If we face a loaded gun to our heads, it is not a fair negotiation, but at least it creates room for both sides to find a solution."
The case, one of several trade complaints that the EU has brought against China, is the largest trade investigation the European Commission has ever undertaken; imports from China in the sector amounted to 21 billion euros in 2011.
De Gucht said the 11.8 percent duty would apply until Aug. 6. If no settlement is reached, the average rate will then rise to 47.6 percent - in effect blocking China's market access. In December, that rate will be put in force for five years.
Senior EU and Chinese officials called each other last weekend to try to take the heat out of the dispute between two of the world's largest trading powers.
China has warned of repercussions. Premier Li Keqiang told European Commission President Jose Manuel Barroso on Monday that the dispute touched on China's "major economic interests".
"APPLYING THE RULES"
De Gucht, a Belgian lawyer and advocate of free trade, defended the duties as an emergency measure to provide "life-saving oxygen" to a sector suffering from Chinese dumping:
"This is not protectionism, rather it is about ensuring international trade rules (apply) to Chinese companies."
The case has tested whether EU governments can unite behind the European Commission on global trade issues and overcome worries about retaliation.
Germany and Britain say their companies could be disadvantaged in China's growing markets such as financial services and telecoms if Brussels hinders Chinese business in Europe. But France and Italy argue that Chinese firms are unfairly benefiting from state subsidies that allow them to flood Europe with cheap goods and undercut local producers.
Chinese firms have captured more than 80 percent of the European solar panel market, from nearly zero a few years ago, and China's solar panel production is 1.5 times the global demand, according to the European Commission.
"The solar panel case should be seen in the context of Western attempts to discourage China from free riding on an open trading system," said Simon Evenett, professor of international trade at St Gallen University in Switzerland.
The United States levied sanctions on Chinese solar panels in 2012 although, unlike the EU duty, they did not apply to the wafers used to make solar cells.
The Commission also has a related investigation into alleged subsidies for China's solar industry, following a complaint by Germany's SolarWorld, which is leading the European challenge to China.
The European solar energy market, the world's biggest, is dominated by Chinese suppliers including Yingli Green Energy , Suntech Power Holdings Co Ltd, Trina Solar Ltd and Canadian Solar Inc.
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