(Adds comments by Trudeau, union leader)
OTTAWA, March 21 (Reuters) - Canadian Prime Minister Justin Trudeau said on Wednesday for the first time that a deal to renegotiate NAFTA was likely, amid signs negotiators may be closer to settling one of the regional trade pact's most contentious issues.
"We remain very confident that a win-win-win deal is not only possible, but likely," Trudeau told a Toronto business audience.
The head of Canada's Unifor union - who has close ties to Ottawa's negotiators - said the United States had dropped its insistence that all autos made in NAFTA countries have 50 percent U.S. content. The demand - rejected by Canada and Mexico as completely unworkable - had become a major sticking point.
"The United States withdrew it," Unifor President Jerry Dias said by phone after speaking to Canadian government officials.
"NAFTA is going nowhere as long as they kept that there and I think they realized that," he added, noting that U.S. auto companies had lobbied against the idea on the grounds it would disrupt a highly integrated industry.
An industry source familiar with the negotiations also said the United States had dropped its demand and added the "sides are still very far apart, but there's movement." Canadian officials were not immediately available for comment.
The news, first reported by Canada's Globe and Mail newspaper, helped the Canadian dollar post its biggest gain against the U.S. dollar in nearly four months, while Mexico's peso firmed more than 1.5 percent.
Officials are due to meet in April for an eighth round of negotiations on updating the $1.2 trillion North American Free Trade Agreement. Talks have bogged down as Canada and Mexico attempt to digest Washington's far-reaching demands for changes.
U.S. Trade Representative Robert Lighthizer said on Wednesday the three countries in NAFTA were "finally starting to converge" on auto content requirements.
But he also attacked what he called Canada's "Third World" intellectual property laws and demanded changes to Canadian tariffs and import curbs that protect domestic dairy producers.
Trudeau told reporters later he would continue to defend the system "because it works."
TAKING NOTHING FOR GRANTED
The disagreement underlines how much work remains to be done, especially given that U.S. President Donald Trump has threatened to abandon NAFTA unless it is reformed to his liking.
A senior legislator from Trudeau's ruling Liberal Party told reporters nothing could be taken for granted.
"There are good signs ... (regarding) automobiles, but it's too soon to declare any sort of progress that's definitive," said Andrew Leslie, parliamentary secretary to Foreign Affairs Minister Chrystia Freeland.
Flavio Volpe, president of the Toronto-based Automotive Parts Manufacturers' Association, said the U.S. side had shown more willingness to compromise on content over the past month.
"Everything I hear and see supports the notion that we are collectively working toward a completion" of NAFTA rather than preparing for a U.S. withdrawal, he said by phone.
Mexican Economy Minister Ildefonso Guajardo plans to hold talks with Lighthizer this week, according to an official familiar with the matter.
Last week, Guajardo said if the three countries did not finish the talks by the end of April, the process would drag on at least until December.
Mexico's presidential vote is to be held on July 1, while U.S. congressional elections are set for November. (Additional reporting by David Chance and Steve Holland in Washington, Dave Graham in Mexico City and Fergal Smith in Toronto; Editing by G Crosse and Peter Cooney)