By Robin Emmott
SANTIAGO (Reuters) - EU leaders won a promise from Argentina and Brazil on Saturday to revive stalled talks on a free-trade deal that would be a major prize for Europe as it emerges from crisis, but disputes over key issues mean a breakthrough appears distant.
At a summit in Santiago, German Chancellor Angela Merkel led the Europeans in a new push in the negotiations with the South American trade bloc Mercosur that is made up of Argentina, Brazil, Paraguay, Venezuela and Uruguay.
In a region whose economies are in markedly better shape than Europe's, Merkel's persistence appeared to pay off after she met her Brazilian and Argentina counterparts and warned them not to revert to the kind of protectionism of the 1930s that deepened the Great Depression.
"A tremendous effort has been made to install new momentum into the discussions," the EU's Trade Commissioner Karel De Gucht told Reuters during the summit. Asked if there had been a breakthrough, he said: "I think we have to be careful with that word. It's moving on the political front."
Five years after the global financial crisis and with the euro zone in its second recession since 2009, the European Union needs Latin America's buoyant economies. But it is frustrated by Brazil and Argentina's policies to protect local industry.
Both sides have now agreed to exchange offers by the end of the year on how far they are willing to go in opening up sectors ranging from services to agriculture and De Gucht said the European Union will reciprocate Mercosur's offers.
"We need to have open markets in terms of free trade and not protectionism," Merkel told a meeting of business leaders. "History taught us that in the '20s and '30s," she said, flanked by the pro-free trade presidents of Mexico and Chile.
Negotiations on a trade pact with Mercosur began in the 1990s and were relaunched in 2010. If successful, the accord would encompass 750 million people and $130 billion of annual trade.
But talks have yet to make real progress due to disputes over European farm subsidies and moves by Brazil and Argentina to shield local industry from cheaper, foreign-made imports.
In a further complication, Venezuela became a member of the bloc last year. Its president, Hugo Chavez, is an outspoken critic of free trade.
In the meantime, Brussels has signed free-trade deals with a number of Latin American countries, including Mexico, Peru and Chile, exposing a split between the free-trade advocates on the Pacific side and the more closed economies, such as Brazil, Argentina and Venezuela, on the other side of the continent.
Standing out in orange among other leaders' dark suits, Merkel shared a joke with Brazilian President Dilma Rousseff and Argentina's Cristina Fernandez as about 60 leaders posed for a summit photo.
"Within Mercosur, those in favor of this agreement have won the battle," said Gianni Pittella, vice president of the European Parliament, which has to approve the EU's trade pacts.
'LATIN AMERICA'S DECADE'
Europe wants to retain its influence in a region it conquered 500 years ago and where it remains the biggest foreign investor as China steps up its investment in mining and energy.
After decades of hyperinflation and financial crises, Latin America's economic fortunes are now better than Europe's. Latin America's economic output is expected to grow almost 4 percent this year, while the 17-nation euro zone will probably contract.
Latin America's per capita gross domestic product could double by 2030, according to the InterAmerican Development Bank, meaning Europe will have more potential buyers of its cars, luxury goods, banking services and pharmaceuticals.
Gathered at a luxury hotel in a part of the Chilean capital dotted with newly built glass skyscrapers, Colombian President Juan Manuel Santos declared it was "Latin America's decade."
But differences with Argentina and Brazil represent a new hurdle to a Mercosur deal, one that Germany as Europe's top exporter is especially keen to see resolved.
Argentina's fiery, left-leaning Fernandez, slapped sweeping controls on imports in February 2012 in a bid to prop up the trade surplus and keep industry competitive as labor costs soar.
According to Global Trade Alert, an independent body monitoring commerce, Argentina is the world's worst offender when it comes to protectionist measures because the policies affect so many industries and sectors all over the world.
Neighboring Brazil - Latin America's largest economy - has also raised import barriers on goods ranging from European steel to powdered milk. In the first 10 months of 2012, Brazil opened 47 trade defense cases, more than double the number in all of 2011.
(Additional reporting by Helen Popper, Alejandro Lifschitz and Anthony Esposito; Editing by Eric Walsh)