UPDATE 1-Peru's Garcia expected to pick party insider as PM

* Ruling party insider seen as new prime minister

* Garcia tries to overcome worst crisis of term (Adds details, background)

LIMA, July 10 (Reuters) - Peru's President Alan Garcia will likely name Javier Velasquez of the ruling pro-business party to be prime minister as the opposition demands a Cabinet shake up, RPP radio and a source close to the government said on Friday.

Velasquez, a member of the APRA party, is currently president of Congress and would take over leadership of Garcia's Cabinet at a time when his approval rating has plunged to 21 percent.

Opposition parties have demanded Cabinet changes since at least 34 people died in clashes last month between police and indigenous groups in the Amazon rain forest.

Outgoing Prime Minister Yehude Simon was heavily criticized for botching negotiations with protesters, who were demanding the government strike down laws designed to open up their ancestral lands to foreign mining and oil companies.

Garcia has said he will reshuffle his team of ministers this weekend as rising unemployment and a slowing economy contribute to the worst crisis of his term. A third of Peruvians live in poverty and critics say Garcia has not done enough to lift incomes.

Analysts had said Garcia might opt for a political independent who could negotiate effectively with unions and groups representing the poor who often protest against the government.

Garcia instead appears ready to choose a party insider who will be closely associated with his agenda of pushing free-trade deals and encouraging foreign investment.

Garcia is also expected to replace his ministers of interior and trade, but retain Finance Minister Luis Carranza, a favorite of investors. (Reporting by Marco Aquino and Terry Wade; editing by Todd Eastham)