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UPDATE 2-EU trade chief hopeful of exemption from Trump tariffs

* Malmstrom says expects EU to be on exemption list

* U.S. steel, aluminum tariffs set to enter force on Friday

* EU, U.S. agree to discuss trade concerns

* EU taxation a further source of transatlantic strain (Adds more from EU trade chief)

BRUSSELS, March 22 (Reuters) - European Trade Commissioner Cecilia Malmstrom expressed cautious optimism on Thursday that U.S. President Donald Trump would exempt the European Union from import tariffs to be imposed on steel and aluminum.

The United States is set to begin charging import duties of 25 percent on steel and 10 percent on aluminum on Friday, although it appears to be ready at the last minute to consider exemptions beyond those already granted to Canada and Mexico.

Malmstrom met U.S. Commerce Security Wilbur Ross and U.S. Trade Representative Robert Lighthizer in Washington on Wednesday before an expected announcement from Trump on trade later on Thursday, with China seen as a target for more action.

Briefing EU ambassadors and the European Parliament on Thursday morning, before EU leaders meet at 2 p.m. (1300 GMT), she indicated there was a greater willingness to find a solution to avert a trade war.

"I hope that he (Ross) will recommend the exclusion of the EU as a whole to the president. President Trump will make an announcement on possible exclusions. We expect that we are on that list," Malmstrom told the trade committee of the European Parliament.

"It is the president who decides this... but we expect that Secretary Ross will recommend that the EU is excluded as a whole," she continued.

Lighthizer told the U.S. Ways and Means Committee that the United States was in talks with the European Union, Argentina and Australia on granting possible exemptions to metals tariffs, and hoped to settle the issue by the end of April.

Malmstrom and Ross said they had agreed to start immediate discussions on areas of trade concern, including steel and aluminum.

Trump's final word is awaited, but Donald Tusk, who will chair Thursday's EU summit, said he too was cautiously optimistic.

"Leaders will discuss how to respond to President Trump's overall approach to global trade, which could negatively affect jobs all over the world. If the United States turns protectionist for good, the whole world will have a problem," Tusk told a news conference on the eve of the summit.

"We are not there yet and there is still time to act sensibly."

TECH TAX

The European Commission has proposed that, if tariffs are imposed, the bloc should challenge them at the World Trade Organization, consider measures to prevent metal flooding into Europe and impose import duties on U.S. products to "rebalance" EU-U.S. trade.

The one word neither the Commission nor EU leaders will want to use is "retaliation."

"The EU is quite conscious of not wanting to fight the U.S. or give Trump a bloody nose through words," one diplomat said.

The EU leaders' second topic on Thursday, taxation, also threatens to expose transatlantic strains.

The European Commission on Wednesday proposed rules to make digital companies pay more tax, with U.S. tech giants such as Google, Facebook and Amazon set to foot a large chunk of a potential 5 billion euro ($6.1 billion)bill.

EU Economics Commissioner Pierre Moscovici brushed off accusations that he was going after rich American tech companies to enrich EU coffers and France, Germany, Italy, Britain and Spain welcomed the proposals in a joint statement.

However, some smaller countries fear the proposed tax would undermine their ability to attract multinationals and see the measure as more likely to shift tax revenue to bigger EU countries rather than raising more money.

($1 = 0.8143 euros) (Reporting by Philip Blenkinsop, Gabriela Baczynska and Alastair Macdonald Editing by Catherine Evans)