After hours of negotiations in Shanghai, EU Trade Commissioner Peter Mandelson and Chinese Commerce Minister Bo Xilai agreed late on Friday to limit the rise in Chinese exports of textiles and clothing to the EU until the end of 2008, averting the imposition of quotas that could have soured ties.

"(The agreement) has set a new paradigm for settling similar differences in bilateral trade and sent a clear message to the world that dialogue, in lieu of quotas, is the ultimate way toward a satisfactory, win-win solution," Xinhua news agency said in a commentary on its Web site.

Tensions had been running high for months between China and the EU over this year's explosive rise in cheap Chinese textile exports. The EU feared the leap in exports threatened its garment industry and jobs.

The United States has expressed similar concerns since the surge of Chinese products was unleashed by the Jan. 1 abolition of a decades-old global system of quotas.

Washington has already slapped temporary restrictions on seven types of Chinese garment and textile products, provoking an angry response from Beijing.

"The deal will hopefully become a major breakthrough in solving the pending textile trade dispute with the United States," Xinhua said.

"The EU's move is in sharp contrast with the US slapping of import limits, an approach that is widely criticized by the international community as discriminatory and protectionist, undercutting the very principles it is promoting."

Before the agreement was signed, the 25-nation EU was due to also limit shipments of Chinese T-shirts and flax yarn to 7.5 percent over the previous year.

The United States' limits could lead to losses of up to $2 billion for the Chinese textile industry and "affect up to 400,000 workers," Xinhua said.

China's textiles industry employs 19 million people and is a vital cog in its export-driven economy.