Army takes on drug cops in Mexico's richest city

* Army uncovers deep police corruption in Monterrey

* Extortions, kidnapping hurt city's pro-business image

By Robin Emmott

MONTERREY, Mexico, June 11 (Reuters) - Soldiers are cracking down on corrupt police in Mexico's richest city, exposing the reach of powerful drug traffickers who have tarnished its reputation for stability and order.

Heavily armed troops have rounded up more than 80 police in and around the business city of Monterrey this month after finding lists of officers apparently in the pay of the Gulf cartel and its notorious armed wing, the Zetas.

Security raids came to a head this week when masked federal police faced off in the streets at gun point with city cops alleged to work for the drug gangs. Frightened motorists fled their cars for fear of a shootout that was narrowly avoided.

With U.S.-style malls, manicured parks and a car culture, the northern city had long thought of itself as apart from the rest of Mexico, where corruption and poverty is more common.

The breakdown in law and order is damaging the image of one of Latin America's top business cities, home to plants owned by companies including Chinese computer maker Lenovo (0992.HK) and U.S. appliance manufacturer Whirlpool Corp (WHR.N).

Nestled in mountains just three hours south of the Texas border in the state of Nuevo Leon, Monterrey is also home to major Mexican corporations like Cemex (CX.N) (CMXCPO.MX), the world's third-largest cement maker.

"Monterrey is facing a very grave security crisis and is losing its competitive advantage for investment," said textile businessman and prominent anti-crime campaigner Gilberto Marcos. "It used to be ultra safe here and now many businesses face extortion, be it a chain of restaurants, a transport company, cattle ranching."

Drug killings have flared in the city since 2006 in a fight between the Gulf cartel and gangs from the Pacific state of Sinaloa for smuggling routes into the United States.

The drugs war killed more than 6,000 people across Mexico in 2008 and 2,500 people so far this year. It is President Felipe Calderon's biggest challenge and the violence has started to spill over some parts of the U.S. border.

Instability and damage to Monterrey's economy poses a fresh threat to Calderon as he tries to pull Mexico out of its worst recession since at least 1995 and could fuel U.S. concerns that violence is overwhelming its southern neighbor.

Nuevo Leon Security Minister Aldo Fasci says state police and the army have cut violence by 40 percent this year and that Monterrey's 50 drug-related killings last year do not compare with the 1,600 deaths in Ciudad Juarez on the U.S. border.

But crime is escalating as cartels buy off the city's municipal police forces. More than 60 percent of Monterrey's police force, considered among the country's most professional just a decade ago, is believed to be working for drug gangs, state officials and detained police officers say.

VIOLENCE, EXTORTION