UPDATE 1-Canada's Flaherty says no direct China talks on M&A reciprocity

* Says not aware of China-Canada quid pro quo talks

* Govt under pressure to clarify foreign investment rules

* Happy with housing moderation, eyes deficit elimination

OTTAWA, Oct 24 (Reuters) - Canadian Finance Minister Jim Flaherty said on Wednesday he knew of no direct talks between Canadian and Chinese officials about making approval of CNOOC Ltd's bid for Nexen Inc conditional on the approval of Canadian deals in China.

``There have been no direct discussions on that subject of which I am aware,'' Flaherty told reporters in response to a question about reciprocity.

The government has come under pressure to clarify its position on foreign investment after a shock decision to block a bid by Petronas for Progress Energy. Many saw that as raising the risk of CNOOC's bid also being rejected.

Flaherty said work was being done to clarify foreign investment rules and stressed that substantial capital investment was needed for major projects in the oil-rich west of the country and elsewhere.

He said the government remained on track to eliminate the federal deficit in the medium term and was happy to note some moderation in the Canadian residential housing market.

Canada's housing market boomed after the last recession, leading some policymakers to fear a bubble was forming.