claims@ (Recasts with launch of probe)
WASHINGTON, April 18 (Reuters) - The U.S. government launched on Friday a probe into allegations that cheap imports of Mexican sugar are causing nearly $1 billion in damages in the local market, even as the Mexican representatives made a formal rebuttal of the accusations.
The news came as the U.S. trade regulators held their first preliminary conference on charges by U.S. sugar producers that Mexican mills have "dumped" subsidized sugar across the border in a complaint that could lead to duties on Mexican imports and spark retaliation against U.S. exports.
The Commerce Department said it will investigate a complaint filed last month that Mexican suppliers have been dumping the sugar - selling it below cost - or are benefiting from government subsidies.
In a separate public meeting held at the U.S. International Trade Commission, Mexican producers made their first formal response to the surprise charges, saying sugar imports are no threat to the profitable, "well-heeled" and protected U.S. sugar industry.
Industry and government representatives said the country should not be blamed for a collapse in prices.
"Prices have simply returned to historical levels. This has happened the world over, a reality that sugar producers have to grapple with," said Juan Cortina, president of the National Mexican Sugar Chamber.
Indeed, Mexico had deliberately diverted sugar exports away from the United States to relieve over-supply, in coordination with U.S. authorities, he said.
Lawyer Irwin Altschuler, from Greenberg Traurig, said the U.S. sugar industry had just had its most profitable three years ever and a price floor backed by cheap loans and limits on supply gave it the "Rolls Royce of safety nets."
"You can't blame a well-heeled industry, used to getting its way, for pushing yet again. But the Commission shouldn't indulge them," Altschuler, representing opponents to the charge, told the ITC.
The tightly controlled U.S. sugar industry has strict caps on imports - except for those from Mexico, which has unlimited, duty-free access under the North American Free Trade Agreement.
The ITC is due to vote on May 9 on whether Mexican imports harm, or threaten to harm, the U.S. sugar industry.
U.S. sugar producers, who allege dumping margins of 45 percent, said a doubling in Mexican imports in the last year had pushed prices to a decade low and would cost them nearly $1 billion in net income in 2013-14.
"NAFTA is not a license to dump and subsidize sugar and cause material injury to the domestic sugar industry," said lawyer Robert Cassidy, from Cassidy Levy Kent, representing the American Sugar Coalition.
Louisiana sugar cane farmer Todd Landry said his crop would sell for below cost this season, down 14.5 cents per pound since 2011.
"My farm and other Louisiana farms cannot sustain themselves if these prices become the norm," he told the ITC.
"The only reason my farm is at risk is because of Mexican subsidies and then dumping. Mexico has chosen to substantially increase its sugar cane acreage and expand its production far beyond its needs and now they are dumping into our market in order to protect their own market."
Traders fear Mexico may retaliate with its own sanctions on U.S. foods, like high fructose corn syrup, a cheaper alternative to sugar. Mexican Economy Minister Ildefonso Guajardo has warned Mexican farmers have the right to seek an investigation into U.S. fructose production.
Kenneth Smith Ramos, head of the trade office at the Mexican embassy in Washington, urged the ITC to reject the case and avoid any escalation.
"The request, if granted, could seriously disrupt the delicate trade of sweeteners between Mexico and the United States," he said.
"A temporary fluctuation in market conditions should not be used as an excuse to impose what could become a long-lasting trade barrier."
The bid to prevent excessive imports and bolster prices faces criticism from a coalition of sweetener users that fought for changes to the U.S. sugar program ahead of the 2014 farm law.
Tim Jones, senior manager at confectionary firm Just Born, the maker of marshmallow Peeps, said imports were vital to meet demand and he had not seen cheap Mexican sugar being offered as an alternative to U.S. products.
"Restrictions on Mexican imports will harm our company, as well as many other companies operating in the United States that depend on a consistent, reliable supply of sugar," he said.
The Corn Refiners Association said the complaint did not take into account the fact that sugar imports fell sharply in 2012-2013 because of a large domestic crop.
"In these circumstances it is irresponsible for them to assert that unfair foreign competition has depressed U.S. sugar prices at a time when imports declined and domestic production surged," CRA President John W. Bode said in a statement.
(Reporting by Krista Hughes; Editing by Chizu Nomiyama and Andrea Ricci)