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..................   move to prevent its airlines from taking part in the Emissions Trading Scheme is a very bold move and it pushes the Chinese carriers very much into the front line of this particular dispute," Tyler told Reuters.

"This is an intolerable situation which clearly has to be resolved; it cannot go on like this. I very much hope of course that we are not seeing the beginning of a trade war on this issue and eventually wiser counsels will prevail," he said.

China was an early opponent of the EU's cap-and-trade scheme, which has also drawn protests from the United States and India, and the escalating row threatens to hamper efforts to work out an international solution to Europe's sovereign debt crisis.

By banning its airlines last week from co-operating, China hardened its stance just ahead of a February 14 Beijing summit at which the EU will seek Chinese help to ease its debt crisis.

The EU says its scheme to charge airlines for emissions on flights into or out of Europe, which took effect on January 1, is needed as part of the fight against global climate change.

It maintains it was driven to act after more than a decade of inaction at the United Nations' aviation standards agency, the International Civil Aviation Organization (ICAO), which has yet to find a global solution to tackling airline emissions.

Tyler said ICAO's chambers were the only forum for resolving the row and he and other airline industry officials noted that the EU had indicated willingness to avoid further isolation.

"The European Commission is now much more open to an ICAO solution," he said. "I very much hope that the EU and all its member states will work hard with ICAO to come up with a global solution. It is not going to be easy."

Tyler was speaking on the eve of the Singapore Airshow.

MORE AIRLINE BANKRUPTCIES POSSIBLE

Last week the senior EU civil servant responsible for climate action said Brussels preferred multilateral discussion.

"We have been clear that we are willing to review our legislation in the light of agreement on market-based measures being agreed in ICAO," Jos Delbeke told a conference.

A relative backwater of the United Nations responsible for industry standards, the Montreal-based ICAO has emerged as the potential bulwark against the first serious carbon trade war.

It is widely seen as a challenging task for an agency created to oversee neatly bordered airspace, but which must now try to find an urgently needed formula for tackling aircraft fumes that criss-cross international frontiers.

ICAO has already served as a back-channel for issues deemed too difficult to handle elsewhere, for example providing opportunities for contacts between Washington and Cuba, but has rarely found itself in the diplomatic foreground.

The row comes at a difficult time for airlines as the industry struggles to escape the fallout from high oil prices and the economic uncertainty surrounding Europe's debt crisis.

Tyler said airlines faced a tough year in 2012 and warned of further bankruptcies in Europe or elsewhere if the region failed to resolve its credit problems. The current quarter is traditionally the leanest time for aircraft revenues.

IATA has predicted the global airline industry will make a profit of $3.5 billion in 2012, but says this could flip to a loss of $8.3 billion in the event of deep recession in Europe.

Cargo traffic which acts as a barometer for global trade ticked 0.2 percent higher in December, but Tyler said it was too early to tell whether this signaled a turnaround.

The head of a sister organization responsible for Asian carriers said airlines risked being hurt by any trade conflict.

"The risk for airlines is that if this does degenerate into tit-for-tat trade war, then airlines will be caught in the crossfire from both sides," Andrew Herdman, director general of the Association of Asia-Pacific Airlines, told Reuters.

(Writing by Tim Hepher; Editing by Ron Popeski and Erica Billingham)