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UPDATE 1-U.S. makes NAFTA dairy proposal, no market access request -Canada

(Recasts lead, add details, background)

ARLINGTON, Va. Oct 13 (Reuters) - U.S. negotiators at talks to renew NAFTA on Friday formally asked Canada to address a bilateral dispute over dairy pricing but did not ask for more access to Canada's restricted market, a Canadian source said.

U.S. producers are unhappy that Canadian farmers this year started selling milk proteins to domestic processors at a discount, curbing the flow of American imports. U.S. officials say Canadian farmers are over-producing milk, contributing to depressed world prices.

Canadian negotiators had been prepared for a possible U.S. demand for greater market access, and it was unclear whether the United States intended to make one at a later date. Canada has vowed to resist any such request.

A spokeswoman for the U.S. Trade Representative's office confirmed negotiators had presented an initial text proposal on dairy and said market access talks had not begun. She did not provide further details of the overall proposal.

The United States wants Canada to act to curb output of the proteins, said the source, who asked to remain anonymous given the sensitivity of the situation.

Canada's position remains that the farmers have done nothing wrong, added the source.

The dispute prompted U.S. President Donald Trump to declare in April that what Canadian farmers had "done to our dairy farm workers is a disgrace".

The United States has long protested against Canada's system of tariffs and export limits designed to protect the domestic market. The so-called supply management system is not part of NAFTA. (Reporting by David Ljunggren; Editing by Susan Thomas and Andrew Hay)