UPDATE 2-Marathon Oil sees smaller budget in 2010

* Shares down 4 pct

* 2009 production seen up 6 pct

* 2010 capex seen at about $5 bln

* Split company still an option, staying integrated for now (Recasts first paragraph; adds background, quotes, details, byline; updates share price)

By Anna Driver

HOUSTON, Nov 19 (Reuters) - Marathon Oil Corp (MRO.N), the fourth largest U.S. integrated oil company, said on Thursday its capital budget will be smaller in 2010, but more dollars will be shifted to its exploration and production arm as it wraps up a big refinery expansion.

The global economic slowdown hurt demand for energy and prompted many to scale back exploration spending and refining projects. The refining sector has been hit particularly hard, as margins are squeezed by weak demand for fuels like diesel and the cost of crude rises.

But Marathon is planning to allocate more capital to its oil and gas business now that it has worked through a slate of projects including the $3.4 billion expansion of its refinery in Garyville, Louisiana.

"Now we are poised for a new wave of exploration success, certainly with the Gulf of Mexico being more of a focal point," Marathon Chief Executive Clarence Cazalot told analysts at a meeting in New York.

The Houston company's capital expenditures will be about $5 billion in 2010, down from about $6 billion in 2009. About $3.5 billion will be earmarked for spending on exploration and production in 2010.

Exploration growth will be focused on deepwater prospects including those in the Gulf of Mexico, unconventional oil and gas like the Bakken Shale in North Dakota and Canadian oil sands, Marathon said.

Marathon has also assembled a shale gas position in Poland, where it sees opportunity in European markets. The company has been granted one license and is pursuing others, it said.

By contrast, the company expects hefty supplies and weak demand to spur prolonged weakness in U.S. natural gas prices, so it has scaled back its drilling here.

Marathon's 256,000 barrel-per-day Garyville refinery has undergone a major expansion since March 2007 to increase its oil refining capacity by 180,000 barrels per day.

This year, the company's oil and gas output is expected to rise 6 percent from a year ago.

Marathon, which once explored the option of splitting its exploration and and refining businesses, said it has plans to remain integrated for now. Still, a split is still on the table.

"That option is still available to the company," Cazalot told analysts.

Shares of Marathon fell 4.3 percent, or $1.51, to $33.19 at mid-afternoon on the New York Stock Exchange amid broad weakness in energy and other stocks. (Reporting by Anna Driver; Editing by Gerald E. McCormick and Richard Chang)