UPDATE 2-Mexico foreign investment climbs despite violence

* Mexico foreign investment nears pre-crisis levels

* Aerospace, auto sectors expand investment

* Home-grown businesses feel threatened, holding back

(Recasts, adds detail)

By Patrick Rucker

MEXICO CITY, Aug 23 (Reuters) - Foreign firms poured billions of dollars of fresh investment into Mexico in the first half of the year as the economy slowly recovered from recession, despite an escalating war against drug cartels.

Foreign direct investment in Mexico climbed 28 percent in the first six months of 2010 to $12.2 billion and could touch $20 billion before year end, the economy ministry said on Monday.

That would make 2010 the strongest year for foreign investment since the $23.2 billion received in 2007.

Mexico's export-driven economy relies on consumer demand from the United States. Increased foreign investment is a clue global manufacturers are positioning themselves for a recovery in U.S. spending.

So far this year, manufacturing received the most foreign investment, followed by commerce, financial services and other services.

Security has been an increasing issue for Mexico since President Felipe Calderon launched a crackdown on cartels in late 2006, sparking a bloody backlash from drug smugglers.

Foreign-owned firms are spending more on safety but the drug war has yet to be a major deterrent to investment.

The violence is "absolutely not an obstacle to the development of our business," Carlos Ghosn, CEO of Nissan Motor Co (7201.T), said during a visit to Mexico City last month.

Nissan plans to spend $600 million to upgrade plants in Mexico and will start making three new low-cost cars at a plant in northern Mexico, positioning the country as its supply hub for markets in the Americas.

Auto manufacturing is at the heart of Mexico's export economy and other firms like Volkswagen AG have recently increased their investment in Mexico.

Mexico's growing aerospace industry, too, is bouncing back from the recent downturn as the $950 million in investment in 2009 is expected to reach $1.2 billion this year.

Consumers in the United States absorb about 80 percent of Mexico's televisions, autos and other exports. Local factories have come to life as demand increases north of the border.

Local businesses are exposed to drug violence, however, and growing insecurity could take a toll on the economy over time. Over 28,000 people have died since Calderon began his campaign.

Business leaders in Monterrey, the country's most affluent city and home to some of Mexico's biggest companies, say some projects have been put on ice as the violence intensifies.

Foreign investors might be alarmed by the violence, but they do not yet appear to be turning their backs on Mexico.

"There could have been some long-term trends playing out in the decline of FDI last year, but its recent rebound suggests the bulk of the such decline was cyclical and it would have been unwarranted to blame it all on idiosyncratically culprits such as the drug war," said Jimena Zuniga, an economist at Barclay's Capital in New York.

Mexico foreign direct investment climbed from 18.9 billion in 2006 to 23.2 billion in 2007 before dipping to 18.6 percent in 2008.

(Reporting by Patrick Rucker and Jason Lange; Editing by Andrew Hay)