A prestigious Canadian commission today strongly urged negotiations with the United States for a free trade agreement between the two countries, saying that such an agreement would be the best way for Canada to avoid being the target of possible protectionist legislation from the U.S. Congress.

The commission report said secure access to the giant American market was essential for Canadian manufacturers to survive in the highly competitive world trade environment.

Observing that Canada currently conducts more than three-fourths of its trade with the United States, the commission declared: "One of the factors which brings home the degree of our vulnerability is the protectionist legislation poised for passage in Congress. Even where we are not the principal target, we risk being the major victim of a spate of protectionist legislation."

The long-awaited report of the Royal Commission on the Economic Union and Development Prospects of Canada, which followed nearly three years of study, was the top news story here today. It appeared likely to become a factor in the contentious debate over whether Canada should strengthen its economic ties with its colossal neighbor to the south.

Conservative Prime Minister Brian Mulroney has said he favors "enhanced" trade with the United States but has avoided defining precisely what that means. The Reagan administration has encouraged Mulroney and indicated that it would like to have a U.S.-Canadian trade agreement serve as a model for future international trade negotiations.

The Royal Commission recommended that any trade agreement negotiated with the United States be phased in gradually, perhaps over a decade, to minimize the disruptions to Canadian manufacturers.

Suggesting that the government create a $3 billion fund to retrain dislocated workers and assist industries hurt by the change, the commission contended that in the long run the liberalized trade would assure Canada of access to the U.S. market. This, in turn, would allow manufacturers to achieve economies of scale and gain experience needed to be an industrial force overseas.

Unless adjustments are made, "Canadians will not achieve the sustained growth necessary to maintain our present standard of living," the report concluded.

Throughout Canada's history, U.S. economic relations have divided "Canadian continentalists," favoring liberal trade arrangements, and economic "nationalists," who prefer tariff protection for Canadian manufacturers. Some nationalists contend that free trade would lead not only to American dominance of Canada's market but also to a loss of cultural identity and political independence.

The warring between these two camps often has involved wider philosophical differences than those dividing Canada's Conservatives and Liberals.

Mulroney is likely to be aided in the current debate by the fact that the royal commission -- an appellation deriving from the days of British empire -- was created by the Liberals when Pierre Elliott Trudeau was prime minister and was chaired by a prominent Liberal, David Macdonald.

Largely overlooked until recently in the United States but acutely felt here is the fact that the U.S.-Canadian trading relationship is the largest in the world. The two-way trade totaled more than $120 billion last year, according to the U.S. Commerce Department.

The balance has tilted heavily in Canada's favor during the past five years, with a surplus for Canada last year of roughly $16 billion, according to U.S. and Canadian trade analysts. The Canadian trade surplus is largely the result of increases in auto exports to the United States by the Canadian subsidiaries of American automobile manufacturers and is expected to increase marginally this year.

Under existing multilateral trade agreements, roughly 80 percent of Canadian exports to the United States are duty-free, as are about 60 percent of American goods exported to Canada.

The principal tariff barriers erected by the Canadians average about 9 percent but run as high as 21 percent and have been imposed largely to protect Canada's fledgling furniture, textile and consumer goods manufacturers. U.S. duties on Canadian goods average slightly less than 5 percent.

There have been a number of small-scale trade disputes in recent months, centering on lumber, steel, fish and hogs. Gov. Bill Janklow of South Dakota posted state troops around slaughterhouses in his state in May to fend off competition from the droves of Canadian hogs being exported.

However, Canada has escaped most of the protectionist proposals in Congress, which have been largely directed at Japan. But as the overall U.S. trade deficit approaches $160 billion this year and protectionist sentiments in Congress and in the nation rise, Canadians are watching with alarm -- particularly a bill backed by Democratic leaders that would impose a 25 percent surcharge on imports from countries that run a large surplus in their trade with the United States.