* WTO to rule in U.S.-Indonesia cigarette dispute-sources
* Indonesia says U.S. clove cigarette ban is unfair
GENEVA, July 20 (Reuters) - The World Trade Organisation is to rule on a dispute between Indonesia and the United States over a U.S. ban on clove-flavoured cigarettes, trade sources said on Tuesday.
Indonesia says the United States is abusing health regulations to shut out clove cigarettes, known as kretek and very popular in the southeast Asian country, while allowing U.S. manufacturers to continue to market menthol cigarettes.
U.S. officials say that flavoured tobaccos risk attracting young people to smoking, and that the ban applies to clove cigarettes from all countries and so is not discriminatory.
A meeting of the WTO's dispute settlement body agreed to set up a panel to rule on the dispute, the sources said.
The U.S. had blocked a previous request for a dispute panel by Indonesia but under WTO rules could not stop it a second time. [ID:nLDE65L1O9]
Indonesia told the meeting its clove cigarettes had been shut out of the market since September last year. It said it had been trying to resolve the issue with the United States for several years, and could not wait for U.S. health officials to complete a review of menthol cigarettes, expected by March 2011.
The United States imported $15.2 million of kretek cigarettes, almost all from Indonesia, in 2008, and the clove sticks accounted for less than 0.1 percent of consumption before the ban, according to Indonesian data, which show menthol cigarettes making up 28 percent of U.S. consumption.
Foreign tobacco producers have been buying up Indonesian manufacturers to acquire kretek brands and build on the potential for normal or "white stick" sales in the world's fifth biggest tobacco market.
In June last year, the world's No.2 cigarette maker, British American Tobacco (BATS.L), bought an 85 percent stake in Indonesia's fourth largest cigarette maker by volume, PT Bentoel Internasional Investama (RMBA.JK).
Philip Morris International (PM.N) acquired the majority of Hanjaya Mandala Sampoerna (HMSP.JK) in 2005. Other Indonesian manufacturers include Gudang Garam (GGRM.JK) and unlisted conglomerate Djarum. (Reporting by Jonathan Lynn; Editing by Jon Loades-Carter)