The WTO on Friday ruled that Japan's punitive tariffs on imports of semiconductors made by South Korean firm Hynix Semiconductor Inc were illegal.
In a ruling released on the WTO's Web site, a dispute settlement panel set up by the organization upheld a complaint launched by South Korea in March last year.
It said Japan had "improperly imposed countervailing duties" and called on Tokyo to bring its measures into line with world trade rules.
In January last year, Japan imposed tariffs of 27.2 percent on dynamic random access memory (DRAM) chips produced by Hynix over the following five years, accusing the company of selling them in Japan at below cost.
South Korea insisted the decision breached world trade rules and was based on allegations only from Japanese firms.
Heavily-indebted Hynix was rescued in December 2002 by a 3.25 trillion won (US$3.7 billion) bailout by bank creditors.
The WTO panel rejected South Korea's request for an immediate refund of the extra duties, saying that it was up to Japan to determine the "modalities of the implementation" of the ruling.
The US and EU also imposed duties on Hynix products in 2004 after claiming that the company's bailout was arranged with the help of government-controlled banks and so constituted payment of subsidies.
In June 2005 the WTO, which referees the respect for the rules of commerce amongst its 150 member states, partly upheld the US measures following a South Korean complaint.