UPDATE 1-As NAFTA talks drag, Mexico suggests timeline could be extended

(Adds comments from Mexico's deputy economy minister, Mexican private sector representative)

MONTREAL, Jan 26 (Reuters) - Mexico on Friday suggested talks to modernize the North American Free Trade Agreement could be extended to give officials more time to address disagreements threatening to undermine the $1.2 trillion trade pact.

As the negotiations grind on, officials are looking at an extra round in Mexico at the end of February, according to sources close to the process.

Teams from the United States, Canada and Mexico are in Montreal for the sixth of seven planned rounds on how to modernize NAFTA but progress is slow. Washington wants major changes to the 1994 pact and addressing various U.S. demands has eaten up time, officials said.

Although the process was initially scheduled to finish by the end of March to avoid clashing with Mexican presidential elections in July, Economy Minister Ildefonso Guajardo said the timeline could be extended.

"This negotiation has a window of opportunity to reach a deal between February and the end of July," he told Reuters.

Canada, which this week presented a series of suggestions on how to unfreeze the talks, quickly welcomed the idea.

"Canada does not believe that we need put an arbitrary deadline on these negotiations at the cost of a good deal for all three countries. We are happy to continue negotiating," said a government source.

U.S. chief negotiator John Melle, asked about a possible extension, told Reuters, "I have nothing to say on that. We are pushing ahead."

A Mexican source briefed on the talks said once the election campaign has started, negotiators could still continue their work but without holding formal rounds.

Juan Pablo Castanon, president of the Consejo Coordinador Empresarial, the umbrella group representing Mexican private sector interests at the NAFTA talks, said negotiations should not be interrupted because of concerns about the election in Mexico or U.S. congressional elections in November.

"If this takes us three, four, five or six months more, then let us take that time," said Castanon.

Mexican deputy economy minister Juan Carlos Baker hit back at the idea that progress was slow.

"I would dispute the notion that talks are not moving forward, or have not progressed, or are in any way, shape or form swamped," said Baker, adding that he was "optimistic" that the results from the round would please ministers from the three nations when they meet on Monday to review the week's work.

The three nations are now looking at an extra week of talks in Mexico, possibly starting Feb. 26, ahead of the last round in Washington at the end of March, said the sources.

Whether more talks can help forge an agreement is unclear, given the gulf between the United States and its two partners.

U.S. President Donald Trump's administration, which blames NAFTA for hurting U.S. manufacturing, wants the North American content of autos to be raised.

Canada responded by suggesting that content would be higher if the value of software and other high-tech materials made by the three nations were taken into account.

An auto industry source said U.S. and Mexican negotiators found the idea interesting but gave no details. Canadian chief negotiator Steve Verheul said on Thursday "there is a lot more thinking" to do about the idea. (Additional reporting by Allison Lampert in Mexico City and Dave Graham in Mexico City; Editing by Jeffrey Benkoe and Alistair Bell)