Frustrated by the U.S. government's new get-tough policy on transfers of military technology, the government of Canada is now prepared to turn to European firms rather than its traditional American partners to build and launch its latest satellites.

The announcement late Tuesday by Industry Minister John Manley turns up the heat in an increasingly acrimonious dispute between the two countries that begin in April, when the United States announced it would no longer treat Canada as a most favored ally in matters relating to technology transfer.

As a result of the new U.S. policy, what had been routine contracting relationships between U.S. and Canadian aerospace companies--over even Canadian subsidiaries of U.S. companies--have gotten tangled up in prolonged licensing processes. Canadian firms fear that the change could jeopardize the $1 billion-a-year in cross-border trade that had been built around the "Canadian exemption" to U.S. technology-transfer regulations.

Manley's announcement was prompted by a six-month delay caused by the United States in development of a sophisticated new satellite for the Canadian Space Agency called Radarsat 2. With its advanced Canadian-designed radars, the satellite will be able to take earth pictures day or night, in any weather, clear enough to pick up objects 10 feet long. While U.S. spy agencies have satellites that get resolutions even finer than that, Washington doesn't want anyone else to have resolutions below 16 feet, out of fear that it could be used by unfriendly governments to keep track of U.S. troop movements.

Although Canada, at the insistence of the United States, has instituted new steps to limit who will have access to Radarsat's photos, that has not satisfied Washington. Earlier this year, the National Aeronautics and Space Administration backed of out its promise to launch the satellite. Now the State Department, after a long delay, has given only a temporary approval for Dulles-based Orbital Sciences Corp. to supply the relatively low-tech chassis for the project, with no assurances of final delivery. Ironically, the Canadian company heading the project is a subsidiary of Orbital's in Vancouver, B.C.

In a speech in Vancouver, Manley made it clear that the efforts by the U.S. government to try to impose its own regulatory regime on Canada gave him no choice but to order the space agency to seek alternative partners and suppliers in Europe. The switch, he acknowledged, could add more than $100 million to the $350 million cost of the Radarsat project.

And its not just the Canadians who are chafing under the new regime. Recently, the head of Washington-based Intelsat said that the new regulations have become so restrictive that it, too, is preparing to make greater use of European suppliers.

The change in U.S. policy has come in the wake of congressional outcry over the transfer of sensitive U.S. satellite technology to China by Loral Corp. several years ago. Privately, U.S. officials also cite several instances in which sensitive military technology has fallen into unfriendly hands after first being shipped to Canada.

Canadian and U.S. officials have been working in recent months to bring the two country's technology-licensing regimes into alignment.