UPDATE 2-Mexico economy to start 2010 in recovery -Carstens

(Recasts; adds quotes and byline)

By Jason Lange

MEXICO CITY, May 19 (Reuters) - Mexico's economy will likely be in a clear recovery from recession at the start of 2010, though Mexican industry will report steep falls in output for several more months this year, Finance Minister Agustin Carstens said on Tuesday.

Mexico is sinking deeper into recession due to plunging demand for its exports from the United States and many analysts expect the economy will contract about 6 percent this year.

"It is a very deep crisis," Carstens said, referring to the global recession, which weighs especially heavily on exporting powerhouses like Mexico.

Mexico reported on Monday that industrial output fell 6.7 percent in March, in the eighth straight month of contraction. Industrial production accounts for about 40 percent of the economy.

"These are readings that we will continue to see for some more months," said Carstens, speaking at an insurance conference.

At the same time, economists in the United States, where Mexico sends about 80 percent of its exports, have increasingly pointed to signs that the U.S. recession is moderating.

"The sharp economic contraction and the sensation that demand is in freefall are abating," Carstens said.

"It is likely that we will start 2010 in a clear recovery," he said.

A rally in Mexico's peso currency and in global equity markets are signs that investors are betting on recovery, he said.

The peso MXN= MEX01 rose to its strongest level against the U.S. dollar since November on Tuesday and the local stock market .MXX hit its highest level since early October on optimism that the U.S. banking sector may be in recovery.

The outbreak in April of the H1N1 influenza virus that forced the temporary shutdown of parts of Mexico's economy is expected to further compound the economic problems.

Carstens reiterated his forecast that the flu outbreak would shave 0.3 percentage point off gross domestic product. Central bank Governor Guillermo Ortiz said on Monday the flu would likely cost 0.5 percent of GDP. (Additional reporting by Luis Rojas Mena;;Editing by Leslie Adler)