The European Commission said Thursday it will investigate whether Chinese makers of solar equipment are illegally pushing their products into Europe , a move that could escalate growing trade tensions between the European Union and China .

European solar manufacturers, which have seen product prices collapse and many peers go out of business since the Chinese arrived, have accused their Asian rivals of undercutting prices unfairly. Chinese companies deny the accusations.

If the Commission finds evidence against China , it could impose tariffs on solar equipment the country exports to Europe . A spokesman for China 's Ministry of Commerce, Shen Danyang, said the Commission's decision would hurt both Chinese and European industry and, "damage the healthy global development of solar and renewable energy."

The Commission's move is widely seen as coming too late to protect a European industry that has already contracted sharply and given ground to Asian rivals. There could be scant reward for further damaging trade relations between Europe and China that are already strained by other battles, such as the inclusion of all airlines in its program targeting carbon emissions.

"I think the chances of survival of western solar manufacturers are slim to none," said Helmut Vorndran, whose private-equity firm, Vorndran Mannheims Capital, invested tens of millions of euros in an east-German maker of photovoltaic solar panels, called Sovello, in April 2010.

At the time, Sovello was operating in a booming market and employed a sophisticated production technique that gave it a cost advantage over competitors, said Mr. Vorndran.

Just a couple of years later, he expects his Sovello investment to result in a big loss after the selling price of the company's products was undercut by Chinese competitors. Sovello filed for insolvency in May and ceased production in August, he said.

Sovello's story isn't unique. The European solar manufacturing industry wasn't long ago a darling of investors, attracting billions of euros in state support from European governments keen for their companies to lead a global green revolution.

Now it has been decimated. Scores of companies went out of business this year alone, including Q-Cell SE, which was the world's largest manufacturer of photovoltaic solar cells in 2007, and German peers Centrotherm Photovoltaics AG, Solon SE and Solarhybrid AG.

Germany once led the world's solar industry. Generous subsidies made it the world's largest solar market and it now has over one million solar facilities with a combined generation capacity of nearly 30 gigawatt-peak, equivalent to around 30 nuclear reactors.

The country is still trying to increase the amount of energy coming from renewable sources to make up for its gradual exit from nuclear power. However, the German government is also proposing to stop subsidies for solar, which it says have become too costly. This has piled further pressure on European solar makers, just as they suffer severe erosion of selling prices for their products.

The average selling price of a solar panel fell by around 40% in the year to June 2012, said Wolfgang Hummel, director at the Berlin-based Center for Solar Research. Many European companies say this has only happened because Chinese rivals are trying to grow market share by selling their wares below the cost of production.

China exported $35.8 billion worth of solar panels in 2011, with the EU accounting for more than 60% of this, Chinese solar companies have said.

"We are fighting for fair competition. Chinese manufacturers are breaking the rules," said the chief executive of Germany 's SolarWorld AG, Frank Asbeck, in a letter to shareholders in July. "Something must be done to fight their illegal dumping."

However, Reinhold Buttgereit, secretary-general of the European Photovoltaic Industry Association, said Europe 's current difficulties should not come as a surprise. Companies didn't invest enough in research and development over the past few years, and so have lost their technological edge over Asian competitors, he said.

Chinese companies themselves are struggling with current prices. Since the anti-dumping complaint was first filed with the European Commission in July, shares in China 's four largest solar panel makers have fallen between 20% and 47%. "These guys are doing so poorly anyway," said Aaron Chew, an analyst at Maxim Group. "It's a real body blow when they already are on their knees."

The Alliance for Affordable Solar Energy, a group of 80 European firms, warned that tariffs could hurt the growth of renewable energy at a time when subsidies are being cut. "Trade barriers would push up costs and damage, possibly beyond repair, the competitiveness of solar power," said Thorsten Preugschas, chief executive of the German project development company Soventix, which is a member of the group.

Few industry experts say the EU investigation offers much of a lifeline.

Top-level political backing for tariffs is lacking. German Chancellor Angela Merkel said on a state visit to China last week that her preference is to resolve the trade dispute through bilateral negotiations, rather than tariffs.

Experts said Ms. Merkel may be fearful that imposing sanctions on China over the solar trade could bring about retaliation on bigger German industries such as the automotive sector, which has seen Chinese sales drive growth during Europe 's economic downturn.

The Commission could also take up to nine months to make a provisional ruling and a further six months for a final decision, a long time in the current market. Only companies that have large reserves of cash to last through the hard times are likely to survive, said Mr. Hummel.

But healthy balance sheets are scarce in the solar industry and generating cash is a major challenge. SolarWorld's cash cushion "might be sufficient," to make it through the market shakeout, said Hamburg-based Warburg Research analyst Stephan Wulf, but the company must start generating cash again by 2014.

SolarWorld reported a net loss of €159.3 million ($200.7 million) in the first half of 2012.

Rescue could lie in sourcing components from Asian rivals. Germany 's Conergy AG has abandoned its production of solar cells and now buys them from Asian suppliers before assembling them into complete solar panels in its own plants. In August, it reported a quarterly profit before interest, taxes, depreciation and amortization for the first time in nearly two years.

SolarWorld and fellow German manufacturer, Bosch Solar, a unit of the world's largest car-parts maker Robert Bosch GmbH, are still active along the entire value chain. These companies have to ask themselves if they can continue in this manner, said Mr. Hummel. The industry requires more specialized suppliers and fewer integrated solar companies that cover the entire value chain, echoing how the automotive sector works, he said.

Mr. Asbeck thinks the European authorities should act to ensure the survival of an independent solar industry. "Neither Europe nor the U.S. can afford to simply hand over such a key technology," he said. "Surrendering the market to China would only slow technological development."

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