Mexico ruling party to struggle at mid-term election

* Calderon's party likely to lose ground

* Defeat may hold back key oil and tax reforms

* Former ruling PRI party set to win

By Alistair Bell

MEXICO CITY, July 5 (Reuters) - Mexican President Felipe Calderon's party is likely to lose ground at mid-term congressional elections on Sunday, leaving him with an uphill struggle to achieve reforms to heal an ailing economy.

Mexico's economy is in deep recession mostly due to the downturn in the United States and, to make matters worse, oil revenues are beginning to dry up.

Calderon, a conservative, wants to overhaul the energy sector to allow more private investment in the search for oil in the Gulf of Mexico. He also seeks to reform the tax system.

But his National Action Party, or PAN, trails the opposition Institutional Revolutionary Party, or PRI, by around 5 percentage points in opinion polls.

Even if the PAN wins, Calderon will probably still be short of the majority he needs to push reforms through the lower house of Congress without long, difficult negotiations.

Calderon is personally popular but the economy is likely to weigh against his party, which ended 71 years of one-party rule in 2000 and promised change.

"I'm upset because they've promised so much that they haven't delivered. The economy is getting worse, violence is growing," said Daniela del Angel, 29, resident of the capital.

The election should not hurt Calderon's war against drug cartels. More than 12,300 people have died since Calderon sent the army against drug gangs in 2006 but Congress has not has played a major role in the fight.

Calderon has lacked a majority in Congress since taking office in 2006, but now more than ever needs backing from opposition deputies to approve reforms.

Mexico's tax take is one of the lowest in Latin America and foreign investors want to see a fiscal overhaul.

Decades of sluggish economic growth have kept most of Mexicans poor and spurred millions to cross the U.S. border in search of work.

Now, Mexican oil output has dropped to its lowest in 16 years, eroding a pillar of public finance, and the economy is set to shrink 6 percent or more this year due to the recession.