The EU and China stepped back yesterday from a potentially bitter trade dispute by negotiating a three-year "transitional arrangement" for the import of Chinese textiles to Europe.

The sides agreed to limit the rise in Chinese textile imports over the next three years to about 10 per cent a year before the trade is fully liberalised in 2008.

The 11th-hour deal followed a tense day of talks between Bo Xilai, China's commerce minister, and Peter Mandelson, the EU trade commissioner, who had threatened to impose new quotas on two types of Chinese imports.

The immediate consequence of the agreement is that the EU will suspend planned sanctions against two categories of exports - flax yarn and T-shirts. Those temporary curbs had been due to come into force as early as today.

Mr Mandelson said the deal announced yesterday was a "once and for all, overall agreement" that would provide both sides with clarity, certainty and predictability.

Mr Mandelson said the agreement demonstrated that China was adopting a constructive attitude towards its place in the global trading system.

China's clothing exports to Europe have grown rapidly since the system of global quotas ended in January. However, Mr Bo said that fears in the developed world were exaggerated.

He said that, by signing the agreement, China was showing it was a "responsible government" that wanted to see "a stable and gradual process" of adjustment to free trade in the textiles markets.

He praised the EU for "seeking to solve problems in a friendly manner".

Mr Mandelson has been forced into a difficult balancing act because of a split among the 25 members of the EU about how to respond to booming Chinese exports.

The EU-China agreement could put pressure on the US to reach a similar agreement with Beijing. Washington's decision to re-introduce quotas has also exposed a clear split in US industry, with retailers starting legal action against sanctions that would limit their access to cheap Chinese clothing.

In a swipe against the US, Mr Bo said yesterday: "Unlike some other countries, the EU did not take unilateral steps against China but discussed the issue in a friendly manner."