Leaders of the world's largest industrial democracies like to keep their discussions on a stratospheric plane when they meet each year, but they will surely be spending some time down in the muck of global farm politics during the Houston summit this week.

A nasty dispute between the United States and Western Europe over prolific agricultural subsidies is likely to intrude on other summit subjects -- the new architecture of Europe, aid to Mikhail Gorbachev's Soviet Union and the shift among Latin American and European nations to market-oriented economies.

Despite the costs they impose on consumers and taxpayers, the subsidy payments governments make to farmers to boost their incomes are commonplace throughout the world, testimony to the importance nations place on agricultural self-sufficiency and to the political power of farm interests.

Americans pay about 45 cents for a pound of sugar, for instance, largely because low-cost imports are blocked by U.S. quotas that are part of a program that guarantees producers 22 cents a pound for raw sugar -- 9 cents more than the world price. Governments in Europe pay roughly the same amount to their sugar producers, lifting consumer prices there to about 50 cents a pound.

The farm trade issue threatens to derail a painstaking effort by the world's trading nations to negotiate new rules governing about $1 trillion in world commerce -- roughly one-third of yearly global trade in goods and services.

These new rules, if adopted under the General Agreement on Tariffs and Trade (GATT), would give manufacturers greater protection against trade in pirated goods; provide for more open commerce in such fast-growing service industries as insurance, banking, tourism and engineering; and pressure countries to accept foreign investment.

GATT Director General Arthur Dunkel said the success of the trade negotiations depends on nations making a series of trade-offs. Agricultural exporting nations such as Argentina, Australia and New Zealand will not approve the trade reforms sought by the European Community, the United States and Japan unless there is substantial progress in curing trade problems in agriculture.

This week's summit meeting had been seen as an opportunity for President Bush and his counterparts to give a big boost to the current GATT talks, which are supposed to conclude in December. But the transatlantic impasse over agricultural subsidies puts that scenario at risk.

"If the leaders don't give the round a shove, it {a successful conclusion} isn't going to happen," said a senior Canadian official.

Agriculture has been the potential spoiler in the free-trade talks from the start, when the United States made the eventual elimination of farm trade subsidies a prime objective of the negotiations. U.S. Trade Representative Carla Hills called these subsidies "the unfairest of unfair trade practices" that distort global agricultural trade, hurt Third World countries and cost American farmers $11 billion a year in export sales.

But Western Europe, represented in the trade talks by the 12-nation European Community, opposed the U.S. demand to eliminate subsidies, as it has in previous global trade talks. The EC, which spends $34 billion on farm subsidies compared with the United States's $8.4 billion, promised a "substantial progressive reduction" in its support program, but it rejected the notion of eventually eliminating it. It also has insisted on being able to shift subsidies from one crop to another.

EC Agriculture Commissioner Ray Macsharry, an Irish politician who is a hard-liner on retaining subsidies, called the U.S. demand for elimination "unrealistic" and "overdramatic."

"It is not going to happen. Politically it is not possible ... particularly not in the EC," with its 11 million farmers compared with 2 million in the United States, Macsharry said.

Heading to Houston, America's allies in Western Europe and Japan have been lobbying administration officials to play down the farm trade dispute and keep the discussion of trade general. "The agricultural issue is too technical and detailed for the leaders to negotiate," a European official said here.

But Treasury Secretary Nicholas Brady promised "a lot of discussion" on the farm trade issue, which he called "key" to the successful conclusion in December of the current session of GATT talks known as the Uruguay Round.

"They have to talk agriculture in Houston whether the other participants like it or not, and they will have to talk about it in greater specificity than they would like," said Agriculture Secretary Clayton Yeutter. "Clearly President Bush has to raise agriculture, not only because he is the host but because it is such a big issue."

Said Hills, "An export subsidy is a government grant to bribe the market, rather than win it on the basis of price and quality."

While Japan has watched the U.S.-EC battle from the sidelines, it isn't immune. The Bush administration expects it to agree to phase out its absolute ban on rice imports and open its market to more efficient rice producers in other Asian nations and the United States.

A European diplomat here said the Bush administration made "a major strategic mistake" by continuing to press for the elimination of export subsidies.

"By putting the stakes so high, the United States antagonized agricultural interests in the Community to such an extent that they feel the position of the United States is not serious. ... The United States has to back down. If it doesn't back down, we won't move. ... That means backtracking very clearly, a loss of face on the part of the United States," the diplomat said.

Adding to the EC's skepticism is the feeling that politically powerful U.S. agriculture groups -- especially the highly protected sugar, peanut and dairy farmers -- will block any elimination of their subsidies. That view is buttressed by Congress, which is drafting a new farm bill that largely continues present subsidies and ignores the GATT talks.

Nonetheless, Bush has insisted steadfastly that, "There simply cannot be a successful conclusion to the Uruguay Round without fundamental agricultural reform."

Bush, who has made the successful conclusion of the Uruguay Round his top trade priority, went further when he told a White House Rose Garden gathering in May: "To the United States, no agreement is better than a bad agreement."

EC External Affairs Commissioner Frans Andriessen, in Washington at that time, retorted, "No agreement is bad."

A senior administration official said France has not budged in all the pre-summit meeting from its opposition to phasing out export subsidies. Germany's position may be complicated by early December elections, at the same time that the GATT talks are concluding, that will lead to a formal unification of the two Germanys. This could force Chancellor Helmut Kohl to choose between gaining the support of inefficient farmers in Bavaria and East Germany or run the risk of scuttling the trade talks that could help Germany's export-oriented manufacturing industries.

With both sides at an impasse, international farm trade consultant Dale Hathaway said the United States and the EC will have to decide whether it is worth scuttling a wide-ranging package of new free trade rules if it doesn't include substantial reforms in farm trade.

Hills paints an "Apocalypse Now" picture of the world if the GATT talks fail: "Your job is in jeopardy. Trading blocs in Europe and Asia have thrown up an impenetrable array of tariffs, quotas and investment restrictions to American exports. Businesses are folding. Unemployment lines lengthen daily. Banks are foreclosing on homes and factories."

She said, however, that the president is willing to take that risk if the EC doesn't move on liberalizing farm trade. EC officials say the administration is bluffing, and in the end -- as it has before -- will cave in to save the trade talks.

"We wonder when the Americans and the Europeans are going to blink," said the senior Canadian official. He added that Houston provides "a major opportunity for a wink if not a blink."