NAFTA Talks at Standstill Over Side Deals : Trade: Canada still offers hope of reaching accord after rejecting compromises on labor and environmental issues.

Talks on side issues related to the North American Free Trade Agreement have reached an impasse, adding to growing uncertainty about the future of the wide-ranging proposal.

Although talks are stalled, there is still hope of reaching an accord on crucial side deals, Canadian Prime Minister Kim Campbell said Thursday.

“We have a bit of an impasse with our partners in the negotiations,” Campbell said, a day after rejecting a compromise on side deals relating to environmental and labor issues.

“I hope it can be resolved, because I think we’d like to move ahead with the agreements,” Campbell said. “At the moment, we’re just holding firm. There may be a compromise that can be worked out that could resolve the issue.”

Campbell’s statement came a day after news that Mexico considered the NAFTA negotiations at a “breaking point” over sovereignty issues.

Campbell said she spoke Wednesday with Mexican President Carlos Salinas de Gortari but has yet to discuss the stalemate with President Clinton.

Concern about the talks hurt stocks in Mexico, which is relying on passage of NAFTA to bolster its economy. The key 37-share Bolsa index fell 31.21 points, or 1.72%, on Thursday.

“Throughout trading, the main influence was the news on NAFTA, which some investors saw as not very encouraging,” one analyst said.

The agreement, which is supposed to take effect Jan. 1, would create a free-trade zone with 360 million consumers and annual production worth $6.4 trillion.

Campbell’s decision to reject the compromise on side deals came after six days of negotiations in Washington between top U.S., Canadian and Mexican trade officials.

The side deals in question are considered crucial to winning U.S. congressional approval of the agreement, which would link the three countries in the world’s largest tariff-free trading bloc.

Some key members of Congress want the United States to be able to use sanctions--duties or import quotas--to satisfy environmental critics who fear that lax enforcement of Mexican laws will lure investment south of the border.

But Campbell has rejected such sanctions as a way of enforcing the labor and environmental standards.

“Our position is that they’re quite unnecessary,” Campbell said. “We have the provisions in our own courts if there were to be any judgments or any fines levied as a result of failing to observe our own laws.”

As pressure has mounted, the Canadian government has ordered a clampdown on comment from officials.

The next move is likely to be Mexico’s, which opposes the idea of settling environmental disputes in its court system.

A panel similar to those established under the Canada-U.S. free-trade deal would assess whether the government was at fault and levy any necessary fines, with sanctions kept only as a last resort.

The Canadian Parliament has passed legislation to implement the trade agreement.