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UPDATE 2-U.S. slaps dumping duties on Canadian lumber, excludes some provinces

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WASHINGTON, June 26 (Reuters) - Escalating a trade dispute with Canada, the U.S. Commerce Department on Monday slapped preliminary anti-dumping duties on Canadian softwood lumber of up to 7.72 percent, but decided to exclude three Atlantic provinces from such punitive tariffs.

When combined with preliminary anti-subsidy duties issued in April, the new measures will bring total duties on Canadian lumber to between 17.41 percent and 30.88 percent, the Commerce Department.

The announcement, largely expected, drew a fresh vow from the British Columbia government to fight for its forestry sector.

"The only long-term solution is a negotiated trade agreement. We will ensure B.C.'s interests are protected in any such agreement," said John Rustad, the province's minister of forests, lands and natural resource operations. "The alternative is to be subject to U.S. legal processes designed to favor a few select timber barons."

Earlier on Monday, the U.S. Commerce Department said it made a preliminary decision to exclude Newfoundland and Labrador, Nova Scotia and Prince Edward Island from its investigation into whether Canada is dumping or unfairly subsidizing softwood lumber sold in the United States.

Until the decision is confirmed, U.S. Commerce Secretary Wilbur Ross said the duties would still be collected on lumber from the three provinces. The exclusion does not include New Brunswick, an Atlantic province bordering Maine that is also a major producer of softwood lumber.

The U.S. anti-subsidy and anti-dumping probes affect about $5.66 billion worth of imports of the construction material, and they show the United States taking a tough stance on trade with Canada as the two countries and Mexico prepare to renegotiate the 23-year-old North American Free Trade Agreement (NAFTA).

U.S. lumber producers asked the Commerce Department last November to investigate what they viewed as unfair subsidies to Canadian competitors who procure their timber from government lands at cheaper rates. U.S. lumber producers generally cut timber grown on private land.

Much of the wood in the excluded Canadian provinces is also harvested from private land, and the three provinces had argued that they operate under more of a free-market model.

Commerce said it is scheduled to announce a final decision on the anti-dumping duties on Sept. 7. Its preliminary duties were 7.72 percent for Canfor Corp and related firms, 4.59 percent for Resolute FP Canada, 7.53 percent for Tolko Industries, 6.76 percent for West Fraser Mills and 6.87 percent for all others.

NAFTA talks are expected to begin around Aug. 16 after a 90-day legal consultation period. (Additional reporting by Eric Walsh in Washington and David Ljunggren in Ottawa and Nicole Mordant in Vancouver; editing by Tim Ahmann and Clive McKeef)