By Peter Blackburn

BRUSSELS, Aug 10 (Reuter) - The European Union, keen to avoid another damaging fisheries dispute, says it hopes to reach a three-year deal with Morocco that would allow its fishermen to return to Moroccan waters next month.

More than 700 vessels, mostly Spanish, have been tied up in port, denied access to Moroccòs rich Atlantic fishing grounds after a previous pact was terminated a year early on April 30.

"The objective is to allow the EU fishing fleet to start fishing by September 1," said an EU source, who is closely involved in the talks. He added that he believed agreement was possible given a will to compromise by both sides.

The European Commission and Morocco start a sixth round of negotiations on Friday which EU sources said were expected to last days, if not weeks, because the two sides were still far apart after the last round in Rabat in early June.

Since then, EU Fisheries Commissioner Emma Bonino and Morocco Fisheries Minister Mustapha Sahel have agreed a "platform" for a new bid to break the deadlock.

The main problem is over Moroccòs demands for sharp cuts in fish catches to protect threatened stocks and allow its fishing fleet to develop. It sought a 65 percent cut in catches of octopus and squid and a 50 percent cut in northern shrimp and hake trawling over three years.

"A reduction is agreed in principle - the problem is to fix the level and the time period," the EU source said.

Morocco also wants EU vessels to land most of their catches in Moroccan ports. It has shown little interest in EU proposals to create joint fish processing and distribution ventures.

The EU favours financial incentives, such as a reduction in fishing licence fees, rather than mandatory measures.

"It should be possible to reach a compromise," said the EU source.

Compensation in exchange for fishing rights will depend on fishing possibilities and conditions. Due to an expected cutback it is likely to be less than the annual $135 million paid under the previous four-year agreement.

Both sides agree on the need to protect fish stocks but still have to settle details of control measures, such as satellite tracking and on-board observers.

The agreement is the E s most important external fisheries pact, providing a livelihood for 28,000 people, including 8,000 fishermen, in southern Spain, the Canary Islands and Portugal.

Spanish fishermen, who have been compensated by the Spanish government for income losses, have blockaded southern ports in recent weeks, stopping imports of Moroccan fish into the EU and demanding a swift end to the dispute.

Earlier this year Spanish fishermen were at the centre of an acrimonious dispute between the EU and Canada over fishing rights for dwindling stocks of Greenland halibut in international waters the northwestern Atlantic.