REFILE-UPDATE 2-Merkel's CDU hoping for comeback in German state vote
* Lower Saxony vote on Sunday kicks off German election year
* Merkel's CDU bounce back strongly in fourth-largest state
* Cliff-hanger vote between centre-right and centre-left
By Erik Kirschbaum
HANOVER, Jan 20 (Reuters) - German Chancellor Angela Merkel's Christian Democrats are hoping for victory in a state contest on Sunday that could end a long losing streak and set the tone for September's federal election.
Led by the premier of Lower Saxony, David McAllister, the Christian Democrats (CDU) and their Free Democrat (FDP) allies have drawn even in opinion polls with the centre-left Social Democrat-Greens opposition in the northern state.
"The winds in Lower Saxony have turned and you can feel that everywhere you go," McAllister said repeatedly during final campaigning. The centre-right trailed by 13 points in surveys through mid-2012.
First projections are expected once polls close at 6 p.m. (1700 GMT) and preliminary results are due within an hour.
The CDU comeback has turned Germany's fourth-most populous state - a genuine swing state - into a ferocious battleground, with Merkel appearing seven times to campaign with McAllister, the son of a soldier from Scotland. The CDU have suffered setbacks in the last 12 state elections.
Merkel, one of the most popular politician in Germany thanks to her handling of the euro zone debt crisis, hopes a victory in Lower Saxony, an industrial and farming heartland, would give her own re-election campaign a boost.
Local issues like education and idled motorway construction projects were the dominant issues.
State officials said 23 percent of the 6.2 million eligible voters had cast ballots by 12.30 (1130 GMT), indicating turnout as sluggish as during the last election in 2008.
"The CDU is doing a good job," said Peter Pietschmann, 68, a retired lathe operator, outside a polling station in the snow-covered state capital Hanover. "Merkel's leading the country well, better than the SPD could."
But Pete Karmarsch, a 44-year-old cook, said the incumbent CDU-FDP coalition had neglected the interests of the middle- and lower class and ignored the states' have-nots.
"I don't like their policies. I don't think they've been good for Lower Saxony. It's time for a change. Hopefully today."
STEINBRUECK HURTS SPD
The SPD and the Greens, who had long been ahead of the centre-right incumbents in polls, have watched in horror as their lead evaporated. Local SPD leader Stephan Weil has been hurt by gaffe-prone SPD chancellor candidate Peer Steinbrueck.
Weil, a solid if less colourful politician, is mayor of Hanover. He first embraced Steinbrueck during 2012 but has kept his distance since the chancellor candidate blundered - complaining about the pay level for German leaders and saying Merkel has an advantage because of her gender.
Many would blame Steinbrueck if the SPD failed to take power in the state, fuelling speculation about whether he can remain the SPD's banner carrier into the September election.
Weil has pointed to polls showing a neck-and-neck race. The CDU were on 41 percent in a final survey on Thursday while the FDP were at the 5 percent threshold needed for seats in the state assembly. The SPD were on 33 percent and the Greens 13.
Wolfgang Rausch, 56, a master craftsman, said he would split his two ballots and vote for both the CDU and their FDP coalition partners - Germans have two ballots: one for a candidate in their constituency and a second for the party.
"The CDU and FDP are better for Lower Saxony," said Rausch, an independent businessman. "The CDU is doing a terrific job."
Annika Heinze said she found McAllister a more charismatic and appealing candidate and likes Merkel but had voted for the SPD mainly because of ideas on reforming education.
"Merkel's been doing a good job for Germany even though she's a bit too passive at times," the 38-year-old high school teacher said. "What the CDU has done with the education system is not good at all. The SPD has better policies on schooling."
Since Merkel's re-election in 2009, it lost power to the SPD and Greens in four important states: Hamburg, Baden-Wuerttenberg, North Rhine-Westphalia and Schleswig-Holstein.
But even if the CDU wins the most votes, their centre-right coalition could be defeated if the FDP does not clear the 5 percent threshold.
Merkel faces a similar dilemma at the national level, where the CDU is ahead of the SPD but doubts remain about whether the FDP will rise from the 4 percent they are getting in polls now. FDP leader Philipp Roesler could be forced to resign if his party falls short of or just scrapes past the threshold.