[Trojan]

By CHRISTOPHER BODEEN

SHANGHAI, China (AP) - The European Union's trade chief urged China on Saturday to rethink its currency's exclusive peg to the U.S. dollar, a day after helping settle a potentially damaging dispute over surging Chinese textile exports.

On Friday, Peter Mandelson and Chinese Commerce Minister Bo Xilai agreed to limit the growth of Chinese textile exports to Europe, which have increased massively since quotas were lifted Jan. 1. Under the deal, all limits will be done away with in 2008.

Mandelson said China should consider linking the value of the yuan to a basket of foreign currencies, saying that could ward off accusations from Washington and elsewhere that Beijing deliberately keeps its currency cheap.

``I happen to believe that a more flexible exchange rate, one that's pegged not just to the dollar but to other currencies, including the euro, will be better for China,'' Mandelson said in an interview with Associated Press Television News.

``I think it would ward off some of the protectionist responses and attitudes to China.''

However, Mandelson did not indicate any urgency by the EU to get Beijing to reform its currency regime. In contrast, Washington has recently intensified the pressure on China to stop linking the yuan at a fixed rate to the dollar, a practice that American manufacturers say has undervalued the yuan and given China a huge trade advantage.

Friday's agreement, announced after 10 hours of talks in Shanghai, calls for gradually rising caps on Chinese textile exports to Europe over the next three years. The caps then expire. No details of the amounts of the limits or the categories of textiles affected were immediately announced.

China is embroiled in a similar dispute with Washington, which already has announced a 7.5 percent cap on the increase in Chinese textile exports this year.

Mandelson praised the agreement as helping eliminate the uncertainty that had roiled the industry and ensuring a healthy long-term trade relationship with China.

``I think it would appeal to people of different opinions in Europe because if will give predictability or certainty for traders,'' Mandelson said.

``It is a breathing space, creating space for European industries to accept to restructure to develop into different parts of the market in order to fend off Chinese competition.''

The EU had threatened to take the dispute before the World Trade Organization if a settlement was not reached by Saturday.

Europe's textile industry says China's cheap products are threatening some 2.5 million jobs.

The EU has blamed China for a drop of up to 50 percent in Portugal's production of T-shirts. Flax yarn imports from China have surged 56 percent in the first three months of this year compared with the same period in 2004.

Despite the successful negotiations, Mandelson did not say whether a similar formula could be applied to a brewing dispute over Chinese shoe exports that European producers complain are flooding their markets.

Future disputes would be handled on an individual basis, he said.