A CONTROVERSIAL deal to dismantle former US navy ships in the North-East was plunged into serious doubt last night when a judge ruled a licence modification to allow the work was "legally flawed".

But the company behind the £11m contract for the Ghost Fleet has blamed the Environment Agency for the setback and challenged it to find a solution.

The agency agreed in the summer to alter Able UK's waste management licence to allow it to break up the 13 obsolete ships, but withdrew permission only days before the first were due to arrive on Teesside last month after a storm of protest.

In between times, environmental campaign group Friends of the Earth sought a judicial review, arguing the modification was invalid because planning permission for a dry dock is not in place.

At the High Court in London yesterday, the agency did not contest the claim and the judge ruled that the alteration to the licence "cannot stand" because it did not consider the impact dismantling the ships without a dry dock would have on nearby wildlife sites.

The judgement prompted calls from the Conservatives for an urgent public inquiry.

But Hartlepool MP Peter Mandelson maintained the Able yard was the best place for the ships to be broken up, and managing director Peter Stephenson called on the Environment Agency to clear up the confusion.

Four of the ships, which contain asbestos and PCB chemicals, are already docked at the Able yard at Graythorp, and if the company is to dispose of them it must now apply for a new waste management licence which will require a full environmental assessment.

Friends of the Earth executive director Tony Juniper said the four ships must be dealt with in the least environmentally damaging way, which might now mean on Teesside rather than being returned to the US.

But he vowed that the battle will now be stepped up to prevent the remaining nine leaving the James River, in Virginia, for Teesside.

"This case was more than a battle over the Ghost Ships - it was about ensuring international laws to protect our wildlife are complied with and local people are involved in decisions that affect their environment."

Shadow Environment Secretary Caroline Spelman said: "It is simply unacceptable that due to the sheer incompetence and lack of communication between ministers, the UK has become the dumping ground for America's highly toxic Ghost Ships."

Yesterday, Mr Justice Sullivan said he eventually intended to quash the modification order, but would delay doing so until next week, when the case returns to court - this time to deal with a planning row involving Hartlepool Borough Council and three residents.

Mr Mandelson said: "The Environment Agency has itself made clear that its modification of the licence was technically flawed.

"It makes no difference to the wider argument that the US navy ships are best broken up by a qualified company like Able UK and, now that they are in Hartlepool, they should be."

Mr Stephenson described the outcome of yesterday's hearing as "a clear judgement of the failings of the Environment Agency".

He said: "We now find ourselves having to examine how we should proceed, recruitment of local people to work on the vessels is on hold, and yet our company has the experience, the track record and the facilities to carry out the recycling of these and other vessels in the best possible environmentally friendly and safe conditions.

"I do not believe that this is in anybody's interests - least of all those organisations and individuals who say their top priority is the protection of the environment.

"What we need now is for the Environment Agency to come forward with proposals which can achieve a sensible - and viable - way forward."