UPDATE 2-Mexico replaces Pemex head as oil output slumps

* Mexico's Calderon removes Pemex boss Reyes Heroles

* New Pemex head urged to speed up exploration

* Falling oil output endangers public finances (Recasts; adds detail on Suarez, background, quote, byline)

By Adriana Barrera and Michael O'Boyle

MEXICO CITY, Sept 7 (Reuters) - Mexican President Felipe Calderon replaced the head of state-owned oil monopoly Pemex on Monday and urged his replacement to reverse slumping production and reserves.

Mexico, which depends on oil sales to finance government spending, has seen its crude output slide more than a quarter since 2004 as yields drop at the aging Cantarell field and new projects prove slow to make up the gap.

Calderon said Pemex boss Jesus Reyes Heroles would be replaced by Juan Jose Suarez, a former banker and beer executive.

"He will have to accelerate the exploration and exploitation of new gas and crude reserves," Calderon said. "His duty will be to do everything in his power for Mexico to retake the position it deserves."

In a shake-up of his cabinet, Calderon also removed Attorney General Eduardo Medina Mora and Agriculture Minister Alberto Cardenas.

Suarez was previously vice president of finance at brewer Grupo Modelo (GMODELOC.MX) and a senior executive at Citigroup's (C.N) Mexican bank.

Pemex is widely seen as a bloated bureaucracy and experts say it lacks funding and expertise needed to tap new reserves and turn around its falling production.

Mexican conservatives admire Brazil's fast-growing Petrobras (PETR4.SA), which is government-controlled but also trades on the stock market, as an ideal model to improve Pemex's performance.

But Mexico's constitution limits foreign investment in the energy industry and Mexicans are passionately against giving up any control of the industry.

In his state of the nation speech last week, Calderon said he wants to reform the oil industry to boost Pemex's profitability but his presidency is at a mid-point and he faces a newly elected Congress dominated by the opposition.

Changes to energy legislation last year to let Pemex to offer incentive-based contracts to private companies are viewed as insufficient.

Dropping oil exports have put Mexico's strained public finances under tight scrutiny.

Oil revenues fund nearly 40 percent of the federal budget and bond rating agencies have warned they may downgrade Mexico's debt ratings due to the country's heavy reliance on the waning oil industry.

On Friday, Energy Minister Georgina Kessel warned she was concerned about Pemex's poor financial results and the company's board was reviewing possible actions to improve the situation.

(Reporting by Adriana Barrera and Michael O'Boyle; Editing by Richard Chang)