* EC action plan on steel could include state aid
* Some groups are against public subsidy to sector
* Shrinking demand causes steel plant closures, job losses
By Francesco Guarascio and Silvia Antonioli
BRUSSELS/LONDON, May 10 (Reuters) - The European Commission (EC) is considering reopening a three-year-old case to examine whether funds granted by the Wallonia region of Belgium to steel company Duferco were illegal state subsidies, a commission source said.
There is heated political debate over the industrial policy the EU should undertake to help the steel sector, which faces plant closures and job losses.
While the EC competition department is looking into the legality of the funds given to privately owned Duferco group, other departments of the Commission are drawing up an action plan that could introduce state aid to the steel sector.
"The Commission is studying the case of a possible concession of illegal state subsidies from the Belgian public authorities to the steel group Duferco, in particular to branches of the group based outside the EU," said the source at the Commission.
No formal investigation has been opened as yet.
A Commission spokesman declined to give an immediate comment.
Duferco, one of the world's largest steel trading and producing firms, said it has not been officially notified of the EC intention to reopen the file so far.
Duferco chief executive Antonio Gozzi, who is also head of Italy's steelmakers body Federacciai, said the file, first opened in 2010, concerns years of partnership between the Walloon authorities and the group, including loans and stakes in its units.
He added that in one instance, Wallonia had bought a stake in a Duferco steel rolling mill in the United States as a guarantee on a loan it had previously granted to Duferco for investment in Belgium.
"All operations between Duferco and the Walloon government were regular market transactions where the government has been paid back and at a market interest rate," Gozzi said.
Earlier this year Duferco closed its steel production site at La Louviere, in Belgium, due to difficult market conditions.
It is one of many firms forced to close their steel production facilities due to shrinking demand in Europe.
French speaking Wallonia has an unemployment rate about twice the level of Flanders in northern Belgium, partly because it was a significant steel producer and suffered from heavy industry's decline.
To try to avoid further closures and their social consequences the EC is drafting an action plan, which introduces new measures of support to the sector, including the freezing of energy taxes for steel plants in Europe.
Some groups within the commission however are against the introduction of public aid measures to the sector.
"It is quite a coincidence that after three years from when it was first opened this file is now back under the spotlight just at a time when there is a political debate over the EU industrial policy," Gozzi said. (Editing by Veronica Brown and Anthony Barker)