* Canada, Mexico won world trade ruling against US labels
* Meat industry says US proposal makes situation worse
* New rule would list where animals born, raised, slaughtered
WASHINGTON, March 8 (Reuters) - The United States on Friday addressed a long-running trade dispute by proposing stricter rules for labeling meat to help consumers identify the country that produced the beef, pork, chicken and lamb sold in U.S. grocery stores.
The United States has until May 23 to redesign its country-of-origin rules to satisfy a World Trade Organization ruling. Canada and Mexico successfully argued the 2008 labeling law discriminated against their livestock and meat exports.
Country of origin labels (COOL) became mandatory in March 2009 after years of debate. Some U.S. farm and consumer groups said the labels would help shoppers make informed decisions, but meat packers and large livestock groups termed the labels a costly paperwork headache.
The Obama administration said it would comply with the trade ruling by requiring labels on muscle cuts, such as steaks and pork chops, to spell out where the animal was born, raised and slaughtered. All the meat in a package would have to come from the same source.
The American Meat Institute objected to that solution. Patrick Boyle, head of the trade group, said the proposal would generate additional costs.
"Only the government could take a costly, cumbersome rule like mandatory country-of-origin labeling and make it worse even as it claims to 'fix it,'" he said.
The administration estimated the cost of compliance at $33 million a year for the 7,181 processors and retailers who would apply the new, more detailed labels.
"These changes will improve the overall operation of the program and also bring the current mandatory COOL requirements into compliance with U.S. international trade obligations," U.S. Agriculture Secretary Tom Vilsack said in a statement.
Under the proposed rule, the mingling of muscle cuts from different sources in the same package would not be allowed. Commingling would be allowed for ground meats, however.
In a 41-page proposal, the government provided examples of how the new rule would work. Chicken breasts from birds grown and slaughtered in America would be labeled "Born, Raised and Slaughtered in the United States" instead of the current "Product of the U.S."
Roasts from feeder cattle born in Canada but raised and slaughtered in America would be labeled "Born in Canada, Raised and Slaughtered in the United States" rather than "Product of the United States and Canada."
The Agriculture Department said it would accept comment on the proposal until April 11.