(Corrects currency exchange to $259.88 million from $473 million in first paragraph)
By Rod Nickel
WINNIPEG, Manitoba, Nov 10 (Reuters) - The Canadian government said on Thursday that it would spend C$350 million ($259.88 million) to help its dairy sector compete against increased European imports allowed under a free trade deal, but the amount falls short of farmers' expectations.
The money includes C$250 million over five years to help farmers update equipment, and C$100 million over four years to help dairy processors modernize operations, Agriculture Minister Lawrence MacAulay said in a statement.
Dairy Farmers of Canada, an influential lobby group, said the money only partially addresses "damage" that Canada's free trade deal with European Union will inflict.
Under Canada's free trade deal with the European Union, European dairies would receive tariff-free access for an additional 17,700 tonnes of cheese, representing 2 percent of Canadian milk production, according to Dairy Farmers of Canada.
The previous Conservative government, defeated last year by the Liberals, had promised C$4.3 billion over 15 years to compensate dairy, poultry and egg farmers, but that pledge dissolved with their election loss.
The European Union and Canada signed a free trade agreement last month but it must still clear some 40 national and regional parliaments in Europe in the coming years to enter fully into force.
Funds for the dairy sector could help processors such as Agropur, Saputo Inc and Parmalat SpA's Canadian unit upgrade plants. Processors are already boosting production of milk proteins for cheese production at the expense of imports, but some need to overhaul their plants.
Canada's supply management system tightly controls dairy prices and production, and Ottawa levies steep tariffs to limit imports. ($1 = 1.3468 Canadian dollars) (Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Marguerita Choy)