Europe faces hurdles at Latin America summit focused on trade
* European Union leaders head to Chile for regional summit
* EU seeks to deepen trade ties with buoyant Latin America
* Health of Venezuela's Chavez to loom over weekend meeting
BRUSSELS/SANTIAGO, Jan 25 (Reuters)F - EU leaders take their hunt for economic growth to Latin America this weekend as the bloc tries to emerge from three years of crisis, but a long-stalled free-trade deal with Brazil and Argentina remains distant.
Uncertainty over the health of Venezuela's cancer-stricken president, Hugo Chavez, will hang over the two-day summit in Chile, which is meant to focus on deepening Europe's trade links with a region that has shown resilience to the global slowdown.
Chavez has not been seen in public since cancer surgery in Cuba six weeks ago, missing his own inauguration for a new six-year term this month.
The absence of the larger-than-life leader at the summit will be conspicuous as many leaders and diplomats fret about the stability of the oil-producing nation.
"Everyone is fixated on this at the moment. It's an extraordinary situation," said a senior foreign diplomat in Caracas. "It's especially important in Latin America for the whole balance of power in the region where he symbolized the left-right split."
That split is increasingly evident in the European Union's economic ties with Latin America, whose leaders including new Mexican President Enrique Pena Nieto will attend the summit.
Mexico has a long-standing free trade pact with the EU. In December, EU lawmakers approved free-trade pacts with Colombia, Peru and six Central American nations in December, a divide has widened between the region's free-trade advocates and sceptics.
Commodities-exporting giants Brazil, Argentina and Venezuela -- which are ruled by left-leaning governments and dominate the five-member Mercosur trade bloc -- have been more reluctant to drop barriers to trade. Both Brazil and Argentina have taken steps to boost local industry that critics call protectionist.
The other two Mercosur members, Uruguay and Paraguay, are also commodity-dependent nations.
"There is an increasing tendency in parts of Mercosur to adopt protectionist measures, which may cast certain doubts on the likelihood that enough political will could be mustered to open markets," EU trade chief Karel De Gucht acknowledged in a Jan. 17 speech to the European Parliament.
Despite such doubts, and persistent disputes over Europe's farm subsidies, Brazil will propose at the summit that the 18-year-old talks are revived, a government source said on Thursday.
European leaders know they need Latin America at a time when the economies of Spain and Italy are in recession and the 17-nation euro zone is only just beginning to show signs it can recover from the debt crisis that nearly tore it apart. Even economic growth in Germany, whose chancellor, Angela Merkel, will be in Chile, will only be about 1 percent this year.
Trade between the EU and Latin America has more than doubled over the last decade to reach some 200 billion euros ($280 billion) last year and Europe is the top foreign investor in Latin America and the Caribbean.
But there is also a huge economic disparity between the regions. While both have populations of about 500 million, the EU's total GDP is three times bigger at $17.6 trillion.
'RESERVOIR OF PROBLEMS'
Negotiators from the EU and Mercosur bloc have been trying for years to strike a free-trade deal that would encompass 750 million people and $130 billion of annual trade.
A deal with Mercosur would help European exporters, particularly of cars, machinery and luxury goods. Advocates say it might also spur economic growth in South America, where many components and input goods for Europe are produced.
But Europe's ties with Latin America's No. 3 economy, Argentina, have worsened over the last year, further complicating the outlook.
President Cristina Fernandez seized control of oil firm YPF from its parent, Spain's Repsol, last year. Tensions have been exacerbated by disputes over Argentine import curbs that have ended up at the World Trade Organization.
The EU and the United States say the curbs are illegal, but Buenos Aires has hit back with its own WTO cases, accusing the EU of limiting its biodiesel exports.
"This is just the beginning," said Fredrik Erixon, a trade analyst at the Brussels-based European Centre for International Political Economy. "There is a whole reservoir of problems ranging from food to investment."
A joint summit statement is likely to make reference to the need to protect foreign investment and free trade, without touching bilateral issues.
Spain's premier Mariano Rajoy may try to discuss setbacks for Spanish businesses with Fernandez and leftist Bolivian President Evo Morales during the summit, but it was not clear if they would meet. Morales nationalised two power firms owned by Spanish utility Iberdrola in December.