In response, the Canadian government warned that it may introduce back-to-work legislation as early as next Monday if the strike drags on and harms the economy.

Talks between the company and the Teamsters Canada Rail Conference, whose 4,800 engineers, conductors and traffic controllers represent nearly a third of CP Rail's workforce, resumed on Wednesday morning.

The Conservative government, which has intervened in other labor disputes over the past year, said it hopes legislation is not needed, because the two sides are very close to settling the dispute.

Labor Minister Lisa Raitt said a decision on when to intervene would depend on how the strike affects important sectors of the Canadian economy, such as autos and potash.

The work stoppage at CP (CP.TO), which ships grain, fertilizer, coal and other goods across the country, would result in C$540 million ( $525 million) in lost economic activity each week, Raitt said.

"If they cannot conclude their deal, we will have the ability to intervene," Raitt told reporters in Ottawa.

"We want to make sure they have some room at the table. They're very close. They can conclude their own deal, and we ask them to do it as soon as possible."

The labor minister indicated the government would not call an emergency session of the House of Commons, currently on a break week.

Raitt's willingness to give the two sides more time contrasted with the speed with which she acted to get Air Canada (ACa.TO) employees back to work in their recent disputes with the country's largest airline.

That's partly because CP's larger rival, Canadian National Railway Co (CNR.TO), is able to pick up some freight that might otherwise ship on CP Rail.

In any case, the left-leaning New Democrats, the main opposition party in Parliament, would likely try to slow any back-to-work bill down, meaning the strike could run at least a week. Eve n so, the Conservatives hold a majority of seats, ensuring that a bill would eventually pass.

PENSION FUNDING

The key stumbling block is CP's desire to reduce pension plan funding by 40 percent, the union said.

CP Rail, which says is offer is "fair and reasonable" has said it needs to cut legacy pension and post-retirement benefits to bring them in line with the rest of the industry.

Employees have been without a contract since the end of last year and have been in talks with CP since October 2011.

The strike comes at a difficult time for CP. Its chief executive quit on Thursday in the face of a boardroom coup led by CP's biggest shareholder, who is demanding that the railway improve its operating performance, currently the worst in the industry.

The Mining Association of Canada said it was concerned about the potential economic impact the strike could have on mining communities. It urged the government to take immediate action to resolve the dispute.

"The CP rail strike will cause a shortfall of essential fuel and supply shipments to mines across Canada," the association said in a statement. "It will also prevent mines from delivering their products to their end-point destinations."

CP said that the strike will have a ripple effect.

"In addition to customer and supply chain impacts, the suspension of CP's freight service will also impact many of the connecting railways with whom we do business," a CP spokesman said in a statement.

Commuter rail services in Vancouver, Toronto and Montreal, which operate along CP's tracks, will continue without disruption during the strike, CP said.

Via Rail, a federally owned company that operates passenger rail services, said the strike was affecting two of its Ontario routes, between Toronto and Ottawa and Sudbury and White River. It said it would offer alternate transportation.

Officers from the Federal Mediation and Conciliation Service are available to assist CP and its union in their negotiations, Raitt said.

Shares of CP were down 1.4 percent, or C$1.05, at C$73.87 on the Toronto Stock Exchange at mid-morning Wednesday.

(Additional reporting by Nicole Mordant, Bijoy Koyitty, Euan Rocha, Louise Egan, Randall Palmer; Editing by Frank McGurty)

• A Permanent Economic Emergency