UPDATE 1-Time to open up to trade, EU tells Argentina, Brazil
* Merkel, EU's Barroso say time to wrap up Mercosur deal
* Latin American, European leaders meet to deepen trade ties
SANTIAGO, Jan 26 (Reuters) - EU leaders urged Argentina and Brazil on Saturday to open up their markets and push ahead on a free-trade deal that would be a major prize for Europe as it battles to emerge from three years of economic crisis.
Negotiations on a trade pact with the South American trade bloc Mercosur - made up of Argentina, Brazil, Venezuela, Uruguay and Paraguay - began in the 1990s.
They were relaunched in 2010, but have yet to make real progress due to disputes over European farm subsidies and moves by Brazil and Argentina to protect local industry against foreign-made imports.
In the meantime, Brussels has signed free-trade deals with a number of Latin American countries, including Mexico and Chile, revealing an increasing split between the free-trade advocates on the Pacific side and the more closed economies, such as Brazil, Argentina and Venezuela, on the other side of the continent.
German Chancellor Angela Merkel, who was among EU leaders in Chile for a two-day summit with Latin America heads of state, said she would discuss the issue with Brazilian President Dilma Rousseff on Saturday.
"We need to have open markets in terms of free trade and not protectionism. That's a conviction that Germany shares with Chile," Merkel said, referring to the EU's trade deal with the South American nation.
"Our objective is to have a similar deal with Mercosur ..." she said, adding that reaching agreement would be "difficult."
Merkel's comments were echoed by European Commission President Jose Manuel Barroso.
"Protectionism is resurging once again," Barroso said. "Free-trade is subject to pressures, but it is our responsibility to open markets... It is time to reach a deal with Mercosur."
A new hurdle to a Mercosur deal is presented by Argentina's curbs on imports. According to Global Trade Alert, an independent body monitoring commerce, Argentina is the world's worst offender when it comes to protectionist measures because the policies affect so many industries and sectors all over the world.
Members of the Group of 20 leading global economies promised not to resort to protectionism following the 2008/09 global financial crisis. But Brazil - Latin America's largest economy - has also raised import barriers on goods from European steel to powdered milk.
Commodities-export giants Brazil, Argentina and Venezuela are ruled by left-leaning governments, and in the first 10 months of 2012, Brazil opened 47 trade defense cases, more than double the number in all of 2011.
Still, EU Trade Commissioner Karel De Gucht, who is also at the Santiago summit, said now was the time to act.
"We need to bring the negotiations with the Mercosur countries to a conclusion," De Gucht said in a speech. "It is no secret that Europe would like to have made more progress in these talks by now."
Europe is the top foreign investor in Latin America and according to a draft of the summit's final statement seen by Reuters, EU and Latin American leaders will commit on Sunday to more open trade and to avoid protectionist policies.