UPDATE 2-Mexico June retail sales down 0.77 pct from May

* Mexico June retail sales fell 0.77 pct from May

* Setback to recovery give central bank room

* Retail sales rise 1.5 pct from year earlier (Rewrites throughout, adds quote from consumer)

MEXICO CITY, Aug 23 (Reuters) - Mexican retail sales fell in June, dealing a setback to the country's recovery from recession and keeping pressure off the central bank to raise borrowing costs soon.

Retail sales fell 0.77 percent during the month from May MXRTSL=ECI, the national statistics agency said on Monday.

Mexico posted one of the worst economic contractions in the world in 2009, and a cooling U.S. economy in 2010 is hitting growth in Mexican exports.

Retail sales were 1.5 percent higher in June compared to the same month in 2009 MXRSLY=ECI, which shows spending is still better than it was last year. At the same time, the data was well below analysts' forecasts ECONMX.

Mexico is relying on strong exports to the United States to help it emerge from recession. Weakness in Mexican exports eventually works its way into the wider economy, hitting the broader service sector.

The nation is also bracing for the impact of a drug war that is scaring away some foreign tourists.

"We live with the fear that we could lose our jobs," said Pilar Gutierrez, who works at a Mexico City hotel and was shopping at a department store.

While Brazil, Chile and Peru have hiked interest rates this year to cool stronger economic recoveries, most economists think Mexico will keep rates on hold until at least mid-2011. (Reporting by Patrick Rucker and Caroline Stauffer; Editing by Paul Simao)