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UPDATE 1 -EU to include ethanol in trade offer to Mercosur, Unica says

(Adds context, comment by European Commission)

SAO PAULO, Sept 29 (Reuters) - With trade talks looming between the European Union and the Mercosur bloc of South American countries, discussions are likely to include ethanol trade, Brazil's cane industry group Unica said in a statement on Friday.

The EU and Mercosur, composed of Brazil, Argentina, Paraguay an Uruguay, will be negotiating market access at the next round of talks in Brasilia starting Oct. 2.

Ethanol was excluded from the EU proposal last year, Unica said, adding Brazil was "surprised" by the move because the biofuel had been part of a 2004 proposal allowing imports of about 1 million tonnes by the EU.

Unica claimed that the new EU offer, scheduled to be discussed from next week, will include a 600,000 tonne-quota for ethanol, of which 400,000 tonnes for industrial use.

"We consider that not acceptable," Eduardo Leão, Unica director, said in the statement, referring to volumes being too low.

A spokesperson for the European Commission, which negotiates on behalf of 28 EU nations, told Reuters that the sensitivities of some EU agricultural sectors have been explained to Mercosur nations.

"A future EU-Mercosur trade agreement will have to take this into account. This means that products such as beef or ethanol will not be fully liberalized, but will only have access through carefully calibrated tariff quotas," the spokesperson said.

The two blocs are also expected to discuss sugar trade in upcoming rounds of talks, Unica said. Brazil has a quota to export sugar to Europe, but it is not free of taxes. Each tonne of sugar inside the quota is taxed at 98 euros.

With the lifting of sugar production quotas in Europe next month, import demand in Europe should drop significantly, Unica said, asking for the elimination of the duty inside the quota.

But EU nations led by France and Ireland have proposed postponing a farm trade offer to Mercosur, creating a potential obstacle to reaching an overall agreement by the end of the year. In a letter to the European Commission, the 11 countries said they were particularly vulnerable to imports of beef, ethanol, sugar and poultry. (Reporting by José Roberto Gomes; Writing Ana Mano; Editing by James Dalgleish)