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UPDATE 3-Key NAFTA talks open in Mexico amid complaint of U.S. inflexibility

(Recasts lead with comments by Canadian union leader)

MEXICO CITY, Nov 17 (Reuters) - A key round of talks to update the NAFTA trade pact formally opened on Friday, but within hours Canada was complaining about inflexibility by the United States, which is demanding big changes, a union leader said.

Canada and Mexico went into the talks prepared to address hard-line U.S. demands that they had previously dismissed as unworkable, officials said.

But Canadian union leader Jerry Dias said Canada's chief negotiator Steve Verheul told him in a private meeting that the U.S. side was unwilling to budge.

"Steve Verheul in essence is saying the United States is not showing any flexibility," Dias told reporters when asked what Verheul told him. Dias repeated his long-standing prediction that the talks would end in failure.

There is relatively little time left to thrash out a deal under the current schedule. Negotiators met in Mexico City for the fifth of seven planned rounds that are due to wrap up by the end of March to avoid affecting Mexico's presidential election.

A spokesman for Canadian Foreign Minister Chrystia Freeland, who is in overall charge of the NAFTA negotiating process, declined to comment on the remarks by Dias. A spokeswoman for U.S. Trade Representative Robert Lighthizer also declined to comment.

U.S. President Donald Trump, who says the North American Free Trade Agreement is a "disaster," has frequently threatened to ditch the pact unless big changes are made.

"We're just getting started. There's a long ways to go. Its a challenging negotiation," Verheul told reporters earlier in the day.

Canadian and Mexican officials initially indicated they would simply not discuss contentious U.S. proposals such as a five-year sunset clause and boosting the North American content of autos to 85 percent from the current 62.5 percent.

The focus in Mexico City would be on making arguments to the U.S. side as to why their proposals as written would not work, a Canadian government source said.

Canada, the source added, was happy to discuss so-called rules of origin governing auto content but insisted the 85 percent figure was impossible.

Canadian sources said on Thursday they were open to a Mexican proposal to review NAFTA every five years rather than the U.S. plan to bring in a sunset clause that would automatically terminate the deal if it was not renegotiated.

The Trump administration on Friday issued revised NAFTA negotiating objectives, largely to reflect demands that it has already made in the talks. These include new language in line with proposals to radically change dispute settlement systems, eliminate Canadian dairy tariffs and allow U.S. protections for seasonal produce growers hurt by Mexican imports.

Unchanged is the U.S. goal that NAFTA be revised to shrink U.S. trade deficits with Mexico and Canada

Canada and Mexico both send a large majority of their goods to the United States and prefer the treaty continue rather than deal with the economic disruption caused by a U.S. withdrawal.

SENDING A MESSAGE

But Mexico has also stepped up its efforts this year to find alternative markets.

Mexico's Foreign Minister Luis Videgaray met with his Russian counterpart Sergei Lavrov in Moscow on Friday to emphasize openness to doing business with nations other than the United States.

"At the same time as we carry out this negotiation process, Mexico is expanding its commercial horizons," Videgaray told a news conference. A senior official in Mexico's foreign ministry said the remarks were intended to send a message to Washington that "we don't depend on them."

A Mexican official said the United States needed to make clear what it hoped to achieve with tougher rules of origin, given the difficulty of raising the threshold.

Noting that 85 percent North American content was not feasible, the official said Mexico did not want "a rupture" to occur in the talks.

Washington also wants NAFTA to set a 50 percent minimum U.S. content requirement for autos, which Canada and Mexico say cannot work.

"Once (the Americans) have explained all that, we can see about finding common ground," the Mexican official said. (Additional reporting by David Lawder, Daina Beth Solomon and Gabriel Stargardter in Mexico City; Editing by Jeffrey Benkoe and Cynthia Osterman)