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CORRECTED-UPDATE 2-Top U.S. official urges deal to resolve U.S.-Mexico sugar row

row@ (In May 19 story, corrects scheduled date for type of duty decisions by Commerce in 9th paragraph)

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 rather than duties on imported sugar.

Speaking on the sidelines of a conference in Mexico City, Vilsack said he was working to avoid duties 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 such as high-fructose corn syrup or soybeans, major exports to the United States.

"I think it reflects Secretary Vilsack's well-founded concerns about a trade war with Mexico," said Greenberg Traurig lawyer Irwin Altschuler, who is representing Mexican sugar producers in the case.

Vilsack, who told a House Agriculture Committee hearing on April 3 the complaint was "ill-timed", 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. The American Sugar Alliance had no comment.

The Commerce Department is due to make a preliminary decision on potential countervailing duties in June. A ruling on anti-dumping duties is due in September. A suspension agreement would only be negotiated if the agency rules imports are being sold too cheaply and recommends duties.

"If (the ruling) is affirmative with a big number, there's an incentive for Mexico to settle, and if it's affirmative with a small number, that's a sign to the U.S. that they could try to get a better deal," said National Foreign Trade Council President Bill Reinsch.

"Basically it amounts to a price agreement: the Mexicans agree to raise prices and the U.S. agrees to suspend the investigation."

An agreement could also impose a ceiling on Mexican sugar imports, which are currently unrestricted. Uncertainty about the case is already driving up prices.

"The threat of not having (Mexican) supplies because of a duty, as well as smaller crops in North America - all of this is leading to higher prices," said Kevin Combs, partner with sugar brokerage McKeany-Flavell in Oakland, California.

A Department of Commerce official said the agency would carefully consider any proposal for a suspension agreement.

"Such an analysis would, of course, take into account the views of all parties to the investigations, including the domestic producers who filed the petitions," the official said.

Vilsack said talks about an agreement, which include officials in his department, were still at a "very preliminary" stage.

Mexico's economy minister said his country remains open to dialog, but would defend domestic sugar producers.

(Reporting by David Alire Garcia, additional reporting by Krista Hughes in Washington and Chris Prentice in New York; editing by Dave Graham, Josephine Mason, Tom Brown and Lisa Shumaker)