The World Trade Organisation agreed on Monday to an Indian demand for a probe into special trade deals granted by the European Union to countries fighting drug trafficking.

India says preferential treatment for 12 Latin American countries, including cocaine producers Colombia, Peru and Bolivia, as well as India's neighbour Pakistan, breaks international rules against trade discrimination.

The EU programme is designed to help countries fight the drugs trade by encouraging the development of other businesses.

The scheme, which also covers countries the European Union deems to be complying with certain labour and environmental standards, has been running for several years.

But it was the inclusion of Pakistan in late 2001 that prompted India to bring its complaint before the Geneva-based WTO's disputes body, trade officials said.

According to Indian diplomats in Geneva, the special terms given to Pakistan to sell goods such as clothing and textiles in the 15-nation European Union were costing India over $300 million a year in lost trade because its own industries could not compete.

"Effectively they are picking our pockets to pay Pakistan," said one diplomat.

The EU denies the policy violates trade rules and it has warned India its action could end up harming countries that are in grave need of assistance.

"They (the policies) are also aiming at responding to the developmental, financial and trade needs of the developing countries," the Union said in a statement to the disputes body.

The European Union had opposed the setting up of a special WTO panel to rule in the row when India first called for a probe in December, but under WTO rules, a panel is automatically appointed at the second request.

The panel could take several months to reach a decision.