US PRESIDENT Barack Obama has started a dairy subsidy war with Europe that could spiral out of control and decimate Australia's dairy farmers.

Australia's political and farm leaders have slammed the US move to introduce dairy export subsidies, warning it would undercut fragile world prices.

They've also accused the US and President Obama of hypocrisy in reneging on earlier commitments to avoid protectionism in the face of the global financial crisis.

"It's a serious backward step towards protectionism," Federal Trade Minister Simon Crean and Agriculture Minister Tony Burke said.

"The US is sending a negative signal to countries that are tempted to introduce their own protectionist measures."

The ministers yesterday wrote to US agriculture secretary Tom Vilsack, calling for a rethink of the decision "as a matter of urgency" and no extension of subsidies beyond the end of next month.

The letter also called for "utmost restraint" in avoiding damage to Australia's dairy markets.

Dairy industry leaders also reacted angrily.

Australian Dairy Industry Council chair Allan Burgess said he was "p...ed off" with the US move.

"It's a blow to the international dairy market at a time when it was starting to stabilise," Mr Burgess said.

"Re-introducing export subsidies will further damage the world market and Australian dairy farmer returns."

The effect of the subsidies on world and farmgate prices was still unclear, "but it certainly won't be a plus", he said.

United Dairyfarmers of Victoria president Doug Chant said the move was a "slap in the face" for Australian dairy farmers and the Government.

"Barack Obama came out early in his term saying he didn't support subsidies," Mr Chant said.

"Is this an example of a president losing his principles?"

Mr Chant said Australia should question its support of American interests if the US didn't back down.

National Farmers' Federation president David Crombie said the US move would derail attempts to address the global economic recession and would prove counter-productive.

"Rather than drag delinquent nations back to the WTO negotiating table to eliminate trade-distorting barriers once and for all, the US is now joining their ranks," Mr Crombie said.

Mr Vilsack last week announced the US was activating the Dairy Export Incentive Program for 2008-09 in response to plunging world prices and the EU's decision early this year to re-introduce export subsidies.

Mr Vilsack said the US move was consistent with World Trade Organisation rules, and it would make "every attempt" to minimise the impact on non-subsidising countries.

He also said the Obama Administration remained "strongly committed" to the pledge last month by world leaders to refrain from protectionist measures.

It's the first time in five years the US has used DEIP subsidies. It can hand out annual subsidies of up to A$150 million a year under WTO rules, covering up to 92,000 tonnes of produce, mainly skim milk powder, butterfat and cheese.

US dairy farmers have until next Monday to make a bid for subsidised tonnage allocations, after which the agriculture department will decide on subsidy levels and who gets what.

World dairy prices have plummeted by 50-60 per cent since late last year under the weight of the global economic crisis. Latest US trade data shows that US dairy exports slumped by more than 50 per cent in the first three months of this year.

Nationals leader and former trade minister Warren Truss labelled the US action as "mindless tit-for-tat" with the EU, which could ignite a damaging trade war.

He said the Government should immediately exercise the dispute-settling measures in the Australia-US free trade agreement if the US didn't back down.

The US subsidy move could not have come at a worse time for market sentiment.

"It sends a bad signal to the market place and its buyers," Dairy Australia trade and strategy manager Chris Phillips said. The extent of the damage wouldn't be known until after bids for subsidised product closed, he said.