The US and Mexico have struck an agreement on Tequila allowing US distributors to import the spirit in bulk and bottle it north of the border.

The dispute began almost two years ago when the Mexican government accused some US bottlers of adding low-grade alcohol and selling the blended spirit as Tequila.

Mexico threatened to insist that the spirit be bottled in one of the five Mexican states that make up the Tequila-producing region. The US government, alongside the Distilled Spirits Council, argued Mexico's stance violated the North American Free Trade Agreement.

The Distilled Spirits Council said it was "extremely pleased" that last week's agreement had been reached, pointing to the fact that almost three-quarters of the Tequila shipped to the US was imported in bulk form.

"The agreement will ensure that the Tequila sold in the US market continues to meet rigorous Mexican standards - a goal shared by the Distilled Spirits Council and its member companies," Peter Cressy, the council's president, said.

He added: "The agreement will allow US and Mexican companies to continue to build on the success that Tequila has achieved in the US market over the past decade."

In 2004, Tequila sales in the US rose 8.3% in volume terms to 8.7m nine-litre cases, with revenues reaching US$3.3bn.