* Police say murder rate declining in Ciudad Juarez
* Businesses say drug war inhibiting recovery in city
* Drug war has killed 5,500 people since 2008 in city
By Robin Emmott
CIUDAD JUAREZ, Mexico, June 16 Frozen investments and canceled factories are hurting a major Mexican industrial hub on the U.S. border as nervous business leaders watch police and troops do battle with brutal drug gangs.
Ciudad Juarez, a manufacturing center and for many years a party town for U.S. tourists, is posing President Felipe Calderon's toughest test since he launched his military-backed crackdown on drug gangs in late 2006. The city, which lies across from El Paso, Texas, has become one of the world's most violent, with 5,500 drug-related killings in just 2-1/2 years.
Empty restaurants and desolate parking lots strewn with rubbish show how the bloodshed has crippled the local economy.
Bird droppings cover the marble steps of the city's pyramid-shaped Sphinx nightclub and a huge "for sale" sign hangs outside. Dentists that catered to Americans seeking cut-rate dental care south of the border are shuttered.
Piles of rubble sit where craft shops and 24-hour bars used to stand as local authorities bulldoze entire buildings to prevent them becoming crime dens. U.S. tourists who used to come on day trips for a taste of Mexico now avoid the city.
Police chiefs say they have reduced drug killings to just over 200 in May, down from almost 300 in October, and aim to bring drug gang crime under control by using improved intelligence to catch hitmen and purge corrupt police forces.
"We were fighting an anonymous enemy," said General Victor Gutierrez, head of Ciudad Juarez's police force. "But the rats are fleeing and we hope that by October, November we will have control," he said, waving his cell phone after taking a call with news of the latest drug murder in a city shantytown.
But businesses say the insecurity is strangling a revival as the world economy pulls out of recession. Ciudad Juarez, which with El Paso handled $50 billion in border trade in 2008, suffered sharply last year, losing 75,000 manufacturing jobs.
"We are seeing a recovery but we are not increasing new investment flows as we hoped. Employment is not growing at the rate it should because of the insecurity in the city," said Carlos Chavira, president of a leading local business group.
He said several U.S. investors in telecoms and electrical goods' factories had frozen investment or canceled plans to build new plants in Ciudad Juarez.
"We've generated 7,000 jobs this year but if it wasn't for the insecurity we would probably be at double that level." ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Timeline on drug war in Ciudad Juarez: [ID:nN16449] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
After the army's failure to bring down the rampant violence in Ciudad Juarez, the government in April handed elite federal police the task of calming the cartel war.
A force of national and city police and thousands of soldiers under federal control is now charged with ending a battle between the Juarez cartel and rival smugglers from the state of Sinaloa that has degenerated into a chaotic fight between drug dealers, cops, and teenage hitmen.
Hotel owners say Ciudad Juarez is still off limits for U.S. executives who used to stay in the city during plant visits.
"We've not seen an improvement in security since the federal police took over. Executives still have to stay in El Paso," said Jorge Ruiz, president of the city's hotel association. He said hotels have lost 30 million pesos ($2.4 million) over the past year due to the violence.
In March, gunmen killed two Americans and a Mexican linked to the local U.S. consulate, prompting an outraged response from President Barack Obama. Calderon pledged to do more to stop the bloodshed.
Federal Police Commissioner Facundo Rosas said he sees a clear trend in falling violence and denied reports that Mexico's top trafficker and head of the Sinaloa alliance, Joaquin "Shorty" Guzman, has won control of Ciudad Juarez.
But he warned against claiming victory over the cartels.
"Whenever that happens, we see these groups trying to show that they're still in charge," he told Reuters.
The city is prized by smugglers for its location in the middle of the border and its road and rail links deep into the United States. The city also has a growing pool of addicts.
Rosas says it is only a matter of time before businesses begin to notice improvements as he spends heavily to bolster security.
But city police say they struggle with meager funds, broken down patrol cars, low morale and few officers on patrol.
"My officers are deserting or have been shot dead. In my sector of the city with 400,000 residents, I've got just 80 police on patrol at any time," said sector police chief Laurencio Rodriguez, pointing to a parking lot where 30 of his 47 patrol cars are broken down due to a lack of money for repairs. (Editing by Catherine Bremer anmd Kieran Murray)