UPDATE 2-CN Rail says arbitrator rules on new 3-yr deal

* Wage increases set for 2009 through 2011

* Agreement terms retroactive to Jan. 1, 2009

* New agreement expires Dec. 31, 2011

* No change to mileage cap (Adds details)

OTTAWA, March 19 (Reuters) - Canadian National Railway Co (CNR.TO) (CNI.N) said on Friday that an arbitrator has decided on wage increases under a new three-year collective agreement between the country's biggest railroad and its 1,700 unionized locomotive engineers in Canada.

The ruling by a government-appointed arbitrator sets out wage increases of 1.8 percent in 2009, 2.4 percent in 2010, and 2.6 percent in 2011. Dental plan benefit improvements come into effect on April 1, 2010, said CN, which received the ruling on Thursday.

Terms of the agreement are retroactive to Jan. 1, 2009 and expire on Dec. 31, 2011.

"With a secure labour agreement in place, we will now work to re-establish a positive dialogue with the TCRC (union)," said CN Chief Executive Officer Claude Mongeau in a statement on Friday.

Teamsters Canada Rail Conference union president Dan Shewchuk was not immediately available for comment.

The decision does not alter the workers' mileage cap, part of a complex wage system in which pay is tied to the distance a train travels.

Engineers went on a five-day strike in late November 2009 after CN unilaterally imposed a 1.5 percent wage increase and raised their monthly mileage cap to 4,300 miles (6,900 km) from 3,800 miles (6,100 km) after 14 months of negotiation failed to produce a new contract.

The railway had said the cap was set during the days of steam locomotives and a higher limit was needed to reflect current conditions and improve productivity. Workers said the change would raise safety issues and cost jobs.

CN rolled back the mileage cap and wage increase as part of an agreement with engineers to end their walkout.

When talks between the company and union ended in mid-December without a new labor deal, the two sides agreed to binding arbitration on wages and benefits.

The engineers' last contract expired on Dec. 31, 2008.

The dispute did not affect CN engineers in the United States, northern Alberta and northern Ontario. (Reporting by Susan Taylor, editing by Dave Zimmerman)