UPDATE 3-Ottawa names mediator for Air Canada pension talks

* James Farley oversaw Air Canada's 2003 bankruptcy

* Company seeks solution on pension funding, other issues

* Union surprised by appointment (Adds Air Canada comment, paragraph 14)

By Susan Taylor

OTTAWA, June 4 (Reuters) - The Canadian government has appointed a mediator to try to settle disagreements between Air Canada (ACa.TO) (ACb.TO) and its unions and retirees over the future of the airline's pension plan, Finance Minister Jim Flaherty said on Thursday.

Air Canada, the country's largest carrier, drew complaints last month when it asked unions to support a moratorium on funding its C$2.85 billion ($2.59 billion) pension deficit.

A solution to pension funding woes and concessions from unions are seen as crucial to keeping Air Canada from filing for bankruptcy protection for the second time in six years.

Former Ontario Superior Court Judge James Farley, who oversaw Air Canada's 2003 bankruptcy, will seek a solution on the company's pension and other issues, the government said.

Air Canada's recently appointed chief executive, Calin Rovinescu, has said labor stability is essential as the airline seeks new financing arrangements in the face of slumping demand.

The carrier's agreements with unions representing about 18,000 employees expire at the end of May and June.

Air Canada's more heavily traded class B shares rose 5 Canadian cent to C$1.41 on the Toronto Stock Exchange, with class A shares unchanged at C$1.40. The stock has fallen more than 80 percent over the past 12 months as the global economic downturn sliced away demand.

News of the mediator came as a surprise to the Canadian Auto Workers union, which said it was awaiting Air Canada's response to its latest offer when Ottawa's announcement was made.

"We were actually making good progress and getting really quite close to resolving the outstanding issues," CAW Local 2002 President Leslie Dias told Reuters. She said a few key issues remain, notably on pension plan funding.

Air Canada told the union an official response to its latest offer will not come until Sunday, as the carrier determines the mediator's terms of reference, Dias said.

The CAW, which has been in talks with the airline for the past two weeks, has demanded it continue funding its pension plan.

"Obviously, we welcome the assistance," CAW President Ken Lewenza said of Farley's appointment. "We'll see how this works out."

The Air Canada Pilots Association, which represents more than 3,000 pilots, said it looked forward to working with Farley.

Air Canada said in a statement it hoped the appointment would lead to a rapid resolution of the pension funding issue and achieve labor stability, both of which it said are needed to address its liquidity constraints.

Versant Partners analyst Cameron Doerksen has estimated total pension funding obligations this year at C$507 million, up C$114 million from last year.

Air Canada gained some breathing room from a key credit card processor late last month, allowing it to reduce the cash it needs on hand to C$800 million from C$1.3 billion.

The Montreal-based company lost C$400 million, or C$4 a share, in its first quarter. Revenue dropped 12 percent to C$2.39 billion.

($1=$1.10 Canadian) (Reporting by Susan Taylor, with additional reporting by David Ljunggren, John McCrank, Allan Dowd; editing by Rob Wilson)