UPDATE 2-Canada proposes July 1 start for biodiesel rule

* Mandate to require 2 pct renewable content in diesel

* Plan hinged on tests of fuel's performance in Canada

* 5 pct renewable content already required in gasoline

* Part of drive to cut greenhouse gases by 4 megatonnes (Adds detail, industry comment)

OTTAWA, Feb 10 (Reuters) - Canada is proposing a July 1 start date for requiring 2 percent renewable content in all diesel fuel and heating oil, the government said on Thursday.

Canada's renewable fuels regulations, published in September 2010, already require an average of 5 percent renewable content in gasoline.

Industry and investors had grown impatient waiting for word on the proposed regulatory change for diesel. The government said it needed proof from demonstration projects that biodiesel could perform under Canadian conditions before it set a start date.

The combined renewable fuel requirements will reduce greenhouse gas emissions by up to 4 megatonnes, the government said, equivalent to taking 1 million vehicles off the road.

Canada has set a target of reducing total greenhouse gas emissions by 17 per cent from 2005 levels by 2020.

Currently, Canada produces about 200 million litres (52 million gallons) of biodiesel annually. It will need about 550 million litres (145 million gallons) to meet government quotas.

Biodiesel is typically produced from animal fat, used cooking oil, soybeans or canola.

Biox Corp (BX.TO) is Canada's biggest and only publicly traded biodiesel producer, with a 67 million litre (17.7 million gallon) plant in Hamilton, Ontario.

"This is a milestone day for homegrown renewable biodiesel in Canada," Canadian Renewable Fuels Association president Gordon Quaiattini said.

"It will help moderate price by adding to our fuel supply, create new jobs, and benefit farmers and drivers alike."

Canadian biodiesel producers export about 75 percent of their fuel to the United States, which will use about 800 million gallons of the fuel in 2011, with demand seen rising to 1 billion gallons by 2012, Quaiattini said. (Reporting by Susan Taylor; Editing by Frank McGurty)