UPDATE 1-U.S.-Canada trade talks restart, tackle 'final' issues

(Adds restart of talks, Brady)

WASHINGTON, Sept 6 (Reuters) - U.S. and Canadian negotiators started a second day of talks aimed at rescuing the North American Free Trade Agreement on Thursday as the deadline for a deal this week, set out by President Donald Trump, inched ever closer.

Aides to the U.S. and Canadian sides worked late into the night after the talks started in Washington on Wednesday, suggesting that areas for potential progress in the talks had been identified.

Canada's top trade negotiator, Foreign Minister Chrystia Freeland repeated that the talks had been "constructive and positive" as she entered the United Trade Representative building in downtown Washington.

"Yesterday evening and really late into the night and early his morning, our officials - both the Canadian and U.S. officials - did a great deal of technical work on a number of issues," Freeland said, without elaborating.

U.S. House Ways and Means Chairman Kevin Brady told reporters that differences remained between the two sides over Canada's dairy quota regime and a dispute resolution settlement procedure.

The U.S. charges that Canada discriminates against its dairy exports. It also wants to end the dispute arbitration panels, something Canada has used to defend its lumber exports to the U.S., which industry here says competes unfairly with domestic forestry.

Both are subject of long-running trade disputes between the two countries.

They are continuing to push toward a conclusion of that agreement. A depends on the seriousness of Canada in resolving these final disputes," Brady told reporters after meeting with United States Trade Representative Robert Lighthizer who is conducting the talks with Freeland.

"My sense is that everyone is at the table with the intention of working these last, always difficult issues out.

Trump has threatened to push ahead with a bilateral deal with Mexico, effectively killing the almost 25-year-old three-country NAFTA pact, which covers $1.2 trillion in trade.

The United States and Mexico reached an agreement on overhauling NAFTA at the beginning of last week, turning up the pressure on Canada to agree to new terms.

Trump said on Wednesday that he expected it to be clear whether there would be a deal to include Canada in a few days.

Wednesday was the first day that negotiations between the two countries resumed after four intensive days of talks last week ended without a deal on Friday after the mood soured.

Canada wants a permanent exemption from Trump's steel and aluminum tariffs, and removal of the threat of auto tariffs from Washington, as well as to preserve its dairy regime and market access for its lumber products.

Trump nearly tore up the NAFTA pact last year after visiting farmers in Wisconsin, a major U.S. dairy producer that Washington says has been hurt by Canadian protectionism.

Trump has claimed that the 1994 pact has caused the loss of hundreds of thousands of U.S. jobs, something that most economists dispute.

Data released on Wednesday showed the U.S. trade deficit hit a five-month high of $50 billion. The shortfall with Canada shot up 57.6 percent.

Trump has notified Congress he intends to sign the trade deal reached last week with Mexico by the end of November, and officials said the text would be published by around Oct. 1.

Negotiators have blown through several deadlines since the talks started in August 2017. As the process grinds on, some in Washington insist Trump cannot pull out of NAFTA without the approval of Congress. ( Writing by David Ljunggren and David Chance; Editing by Bernadette Baum and Alistair Bell)