Chretien, making a late incursion into the months-long dispute, issued a blunt warning to Knowles that subsidies would have damaging consequences for U.S. energy security.

In a letter published Aug. 30 in The Globe and Mail, a Canadian national newspaper, he said the proposed incentives could "artificially depress gas prices, slowing development and production elsewhere in the U.S. and in Canada."

Chretien warned that subsidies would "distort the free market for energy in the northern U.S. and Canada by suppressing and delaying the exploration for and extraction of northern Canadian gas supplies."

The letter was in response to a May 28 letter from Knowles asking Chretien to address what Knowles described as "threatening" remarks by Canada's Natural Resources Minister Herb Dhaliwal, who said subsidies could strain Canada-U.S. relations over northern development.

Knowles asked Chretien to "explain comments made by Minister Dhaliwal when he referred to the credit ... as a 'subsidy' and stated that if this were included in the final (U.S. energy) legislation, your government 'would have to reconsider our current position.'

"His tone appeared threatening, even prompting some writers to use the words 'trade war.'"

Knowles said he assumed Dhaliwal spoke "in the heat of the moment" and based his statements on "incomplete information and that upon reflection he would recognize that this tax mechanism is in keeping with similar Canadian efforts to provide the certainty the private sector requires to invest."

That was seen as a reference to billions of dollars in loans, loan guarantees and other incentives the Canadian government offered in the 1970s and 1980s to promote exploration and development of Canada's East Coast offshore and Arctic.