The ruling could be rendered insignificant, however, by a pending agreement between Washington and Ottawa that would settle the trade battle over softwood lumber, a major home-building component.
The ruling by the three-member appeals panel overturned an April finding that found the US had not broken trade rules in calculating what it charges for the imports.
The appeals panel said the US method was inconsistent with the requirement in trade law that calculations be based on a "fair comparison."
"The Appellate Body recommends that the Dispute Settlement Body request the United States to bring its measure into conformity with its obligations under the Anti-Dumping Agreement," the ruling said.
The WTO was already considering Canada's appeal when the accord was signed July 1 in Geneva. The accord is supposed to conclude the dispute, the White House said last month.
Canada has argued that the US artificially inflated antidumping rates by using a different calculation method to avoid complying with an earlier WTO decision.
Washington imposed antidumping and countervailing duties totaling more than 27% in May 2002, after accusing Canada of subsidizing its lumber industry.
The US Commerce Department, responding to a complaint under the North American Free Trade Agreement, reduced punitive duties late last year from an average of 16% to less than 9%. Separate antidumping tariffs averaging about 4% were not affected.
Canada insists the forest policies of lumber-producing provinces may not mirror US free markets in timber, but they do not amount to subsidies.
Most US timber is harvested from private land at market prices, while in Canada the government owns 90% of timberlands and charges fees for logging. The fees are based on the cost of maintaining and restoring the forest.
The decades-long dispute once fueled talk of an outright trade war between the world's largest trading partners.
Canada supplies about one-third of the US market for softwood, easily sawed pine, spruce and other wood used in home building.
The office of the US Trade Representative has said the deal should go into force after September.
Canadian International Trade Minister David Emerson said last week that Canadian lumber producers would likely lend significant support to the deal when they announce their position on the pact by an Aug. 21 deadline.
The US timber industry said in April it could support the accord. (Dow Jones & Company, Inc.)
