UPDATE 3-Canada says it might join U.S. in granting auto aid

(Adds comments from Ontario premier 7-10)

By David Ljunggren

OTTAWA, Nov 10 (Reuters) - Canada will consider following Washington's example and offer aid to the domestic auto sector, Prime Minister Stephen Harper said on Monday, but added that he did not want the industry to become dependent on handouts.

The Conservative government, which just two weeks ago was leery of granting special rescue packages to the troubled industry, has changed its tune as the magnitude of the sector's woes becomes apparent.

"We are all aware of deep problems of some of the major companies in the auto sector. We're also aware of some actions that are taking shape in the United States. The government of Canada will examine all possibilities. We haven't ruled anything out or anything in," Harper told reporters.

"None of us wants on the one hand a sector that would fail and that would cause tremendous dislocation in the Canadian economy. Neither do any of us want to see a sector that would be permanently supported by the government and that would not otherwise be financially viable."

Harper was speaking after he met the premiers of Canada's 10 provinces to discuss the economic crisis ahead of a major summit next week in Washington on ending the global turmoil.

Ontario Premier Dalton McGuinty, whose province is home to the bulk of Canada's auto industry, says he cannot compete with the $25 billion in technology loans that U.S. vehicle manufacturers have been promised.

Although the federal government has promised the auto sector some C$450 million ($375 million) in grants, McGuinty said more would have to be done and in particular cited the need for loan guarantees.

"I found some positive signals and I am now confident we can work with Prime Minister Harper, (Industry) Minister (Tony) Clement and the automobile sector to find a solution," he said after the meeting, without giving details.

McGuinty said he would meet with the Canadian arms of General Motors Corp (GM.N), Ford Motor Co (F.N), and Chrysler [CBS.UL] -- most likely next week -- to discuss what an aid package might look like.

"We're talking about something that is very urgent. ... I gather that it will be significant and we're going to have to find a way to get there. I don't think we have much choice in this matter," he told reporters.

McGuinty said the Ontario automakers and associated industries employ around 400,000 people and represent 5 percent of Canada's gross domestic product.

Quebec Premier Jean Charest said before the meeting he wanted more aid for the forestry sector, which has been badly affected by problems in the U.S. housing sector. Both he and McGuinty also said Ottawa must take measures to help make credit more available.

During last month's federal election campaign, Harper's Conservatives promised Canada would not run a deficit in any of the next four years. Harper reiterated that the budget would stay in the black this fiscal year but said there was huge uncertainty after that.

($1=$1.19 Canadian) (Additional reporting by Randall Palmer; Editing by Frank McGurty)