UPDATE 2-Fitch downgrades Mexico, says tax hikes not enough

* Fitch cuts sovereign debt rating

* Drop in oil revenues leaves Mexico short

* Mexican peso firms, downgrade factored in (Recasts throughout, adds byline, MEXICO CITY dateline)

By Walter Brandimarte and Jason Lange

NEW YORK/MEXICO CITY, Nov 23 (Reuters) - Mexico, hit by a severe recession and dwindling oil revenues, received another blow on Monday when a Wall Street agency downgraded its debt for the first time in over a decade.

Fitch Ratings cut Mexico's sovereign debt rating by a notch, saying recently approved tax increases were not enough to address fiscal deterioration in public accounts.

The downgrade, which means higher borrowing costs for the Mexican government and companies, is another blow to President Felipe Calderon who is struggling with a raging drug gang war and fallout from the U.S. recession.

But the Mexican peso MXN= strengthened about 1 percent on Monday as many in the market were already expecting the downgrade.

"Recently approved tax measures are a step in the right direction, but more is required to materially address structural weaknesses of public finances especially in the context of continued uncertainty over the outlook for oil production," Fitch analyst Shelly Shetty said.

Mexican oil production has slipped about a quarter from a 2004 peak as reserves in the Gulf of Mexico dry up.

Congress has resisted overhauling energy law to allow private investment in the oil industry to ramp up exploration in the deep waters of the Gulf.

Lawmakers this year rejected a proposal by Calderon to get more people paying taxes to strengthen public coffers.

"This reflects signs that Mexico is not carrying out the structural reforms that the country needs," Gabriel Casillas, economist at JP Morgan in Mexico City, said of the downgrade.

Mexico, an emerging markets favorite in the late 1990s, has trailed behind Brazil in recent years as investors pour money into its economy, South America's largest.

Mexico's debt remains investment grade despite the downgrade and is still one level higher than Brazil on Fitch's rating scale.

The credit ratings agency cut Mexico's foreign-currency issuer default rating rating to 'BBB' from 'BBB-plus.' The outlook on the new rating is stable.

The Mexican economy was in a deep slump for a year, mostly due to a drop in U.S. demand for Mexican exports, but figures released last week show the recession is now over and the economy grew 2.93 percent in the third quarter. (Editing by Alistair Bell and James Dalgleish) ((walter.brandimarte@thomsonreuters.com; Tel: +1-646-223-6319; Reuters Messaging: walter.brandimarte.reuters.com@reuters.net))