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UPDATE 4-Canada suggests it could quit NAFTA talks over dispute mechanism

(Adds comment by trade lawyer)

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, giving the most substantive outline yet of Canada's goals, said she was "very optimistic" the negotiations would be a success.

North American Free Trade Agreement members Canada, Mexico and the United States hold their first session in Washington on Wednesday.

Canada, heavily reliant on exports to the United States, opposes Washington's push to scrap the so-called Chapter 19 dispute settlement mechanism, under which binational panels make 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Noting that Canada had withdrawn its chief negotiator from 1987 talks on a bilateral trade treaty with the United States over the same issue, Freeland said "our government will be equally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."

Freeland later sidestepped reporters' questions about whether maintaining Chapter 19 was a make-or-break issue for Canada, saying she would let her U.S. counterparts know how important the matter was to Ottawa.

Trade among the three nations has quadrupled since NAFTA 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.

Toronto trade lawyer Mark Warner said there few surprises in Freeland's announcement, given Ottawa had already signaled its stance on major issues.

"It's the beginning of a negotiation. Everybody expects posturing," he said by phone, noting Washington had reacted calmly to previous Canadian statements about the importance of dispute settlement.

Freeland, who predicted there would be moments of drama during the talks, said Canada wanted a progressive trade deal featuring stricter environmental and labor standards as well as a focus on climate change, a concept Trump has little time for.

OUTREACH CAMPAIGN

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 to persuade U.S. business leaders and politicians that NAFTA is a success.

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

Freeland stressed that Canada would protect tariffs and quotas that keep domestic dairy prices high and imports low. U.S. dairy farmers strongly dislike the system.

A modernized NAFTA should take into account technological advances and make it easier for professionals to move from one member nation to another, she added. (Reporting by Andrea Hopkins and David Ljunggren; editing by Jim Finkle and Paul Simao)