American lumber interests rejected a Canadian proposal for high-level negotiations yesterday, accusing the government of Canada of using illegal subsidies to capture U.S. sales.

The American lumbermen asked the Commerce Department and the International Trade Commission to impose duties on Canadian lumber to offset 27 percent export subsidies.

The dispute is the most contentious one between the United States and Canada, and threatens to derail talks scheduled to start Wednesday over a free-trade agreement between the two neighboring nations. Negotiations over the lumber issue have been under way between the two governments since January, but so far both sides have been unable to find common ground.

In an effort to forestall the U.S. industry's trade complaint, the Canadians proposed 10 days ago to raise the level of the negotiations to special envoys. U.S. lumber interests last Monday agreed to postpone filing their complaint for a week to give Canada time to present its proposal during negotiations that took place here last week.

Reportedly, the Canadian proposal received a lukewarm reception from the U.S. side, which complained that it failed to deal with the substantive differences between the two countries.

"Whether intermediate level or high level, talks are talks. We need action," said Sen. Max Baucus (D-Mont.).

Canadian lumber producers called the new trade complaint "harassment on a grand scale," and said it is the same as one that was rejected by the Commerce Department three years ago.

In the meantime, however, Commerce has reinterpreted the laws concerning subsidies of natural resources such as timber, and domestic lumber interests said they now have a better case.

The petition charges Canadian provinces with selling "stumpage" -- timber cutting rights -- at artificially low prices that amount to a subsidy. As a result, Canadian lumber has captured almost one-third of all U.S. sales, compared with 19 percent in 1975.

"U.S. mills from Maine to Oregon continue to close and tens of thousands of U.S. workers have lost their jobs because of unfair Canadian timber pricing policies," said Stanley Dennison, chairman of the Coalition for Fair Lumber Imports, which brought the trade complaint.

"We can no longer tolerate delay in securing relief from the Canadian subsidy," he added.

He told a Capitol Hill press conference that the industry would agree to withdraw its complaint if Canada imposed a tax equal to the subsidy on its exports.

Dennison said the lack of a proposal dealing with the substance of the dispute "indicates a lack of commitment toward resolving the issue."