UPDATE 1-Top U.S. official urges deal to resolve U.S.-Mexico sugar row

(Adds quotes, background on sugar dispute)

MEXICO CITY, May 19 (Reuters) - U.S. Agriculture Secretary Tom Vilsack said on Monday he hoped to head off a protracted trade dispute with Mexico over sugar imports by encouraging a negotiated agreement before any sanctions are imposed.

Speaking on the sidelines of a conference in Mexico City, Vilsack said he was working to avoid sanctions almost two months after U.S. producers accused Mexican mills of dumping sweetener in the country.

"We are in the process of encouraging ... folks to figure out a way forward that allows a suspension agreement to take place," Vilsack said.

His comments are the strongest sign yet that the U.S. government wants to work toward a settlement after U.S. trade regulators earlier this month voted to investigate the allegations filed at the end of March.

Many traders fear the complaint could escalate into a broader trade dispute, with Mexico retaliating in other commodities like high-fructose corn syrup or soybeans, major exports to the United States.

Vilsack's comments were also his first since he described the complaint in a House Agriculture Committee hearing on April 3 as "ill-timed".

On Monday, he stressed that U.S. sugar producers would need to support a negotiated agreement, and said they were being urged to do so.

"We'll do everything we can to facilitate conversation, facilitate a resolution," Vilsack said, without giving more detail.

He noted that the U.S. Commerce Department was playing the lead role in discussions and would decide whether or not to impose sanctions on Mexican producers.

Commerce is expected to make a preliminary decision on potential anti-dumping and countervailing duties in June.

Talks, which also include officials in his department, were still at a "very preliminary" stage, Vilsack added.

Last week, Mexico's economy minister said his country remains open to dialog, but is also preparing to legally defend domestic sugar producers.

(Reporting by David Alire Garcia; Editing by Dave Graham, Josephine Mason and Tom Brown)