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UPDATE 2-Canada suggests it could quit NAFTA talks over dispute mechanism

(Recast with additional details, quotes)

OTTAWA, Aug 14 (Reuters) - Canada laid down a tough line ahead of talks on modernizing NAFTA on Monday, suggesting it could walk away if the United States pushed to remove a key dispute-settlement mechanism in the trade deal.

Foreign Minister Chrystia Freeland, outlining Canada's goals, said she was "very optimistic" the negotiations would be a success. NAFTA members Canada, Mexico and the United States hold their first session in Washington on Wednesday.

Canada opposes Washington's plan to scrap the so-called Chapter 19 dispute settlement mechanism, under which binational panels made binding decisions on complaints about illegal subsidies and dumping. The United States has frequently lost such cases.

"Canada will uphold and preserve the elements in NAFTA that Canadians deem key to our national interest including a process to ensure anti-dumping and countervailing duties are only applied fairly when truly warranted," Freeland said in a speech at the University of Ottawa.

Noting that Canada had withdrawn its chief negotiator from 1987 talks on a bilateral trade treaty with the United States over the same issue, Freeland said "our government will be equally resolute." She did not elaborate.

Trade among Canada, Mexico and the United States has quadrupled since the North American Free Trade Agreement came into effect in 1994, surpassing $1 trillion in 2015. But U.S. President Donald Trump regularly calls the treaty a disaster and has threatened to walk away from it unless major changes are made, citing U.S. job losses and a trade deficit with Mexico.

Canada, like Mexico, sends the majority of its exports to the United States and would be hurt by U.S. protectionist moves.

The United States runs a slight surplus in trade of goods and services with Canada, which has mounted a major outreach campaign over the last year to persuade U.S. business leaders and politicians that NAFTA is a success.

"American partners have been listening," Freeland said. "Today, they understand ... that our relationship, the greatest economic partnership in the world, is balanced and mutually beneficial."

Freeland also said Canada would protect its system of tariffs and quotas that keep domestic dairy prices high and imports low. U.S. dairy farmers strongly dislike the system and want it dismantled.

Freeland, who predicted moments of drama during the talks, said NAFTA also needed to be updated to take into account massive advances in technology.

Canada also wants tougher labor safeguards and stronger environmental provisions "to ensure no NAFTA country weakens environmental protection to attract investment," she said. (Reporting by Andrea Hopkins and David Ljunggren; Editing by Jim Finkle and Paul Simao)