UPDATE 2-Mexican ruling party to struggle at mid-term vote

* Calderon's party likely to lose ground

* Defeat may hold back key oil and tax reforms

* Former ruling PRI party set to win (Adds quotes from voters)

MEXICO CITY, July 5 - Mexicans voted on Sunday in mid-term elections for Congress where President Felipe Calderon's party is likely to lose ground, leaving him with an uphill struggle to achieve economic reforms.

Mexico's economy is in deep recession, mostly due to the downturn in the United States, and oil output is falling fast.

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 fall 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 promised change in 2000 when it ended 71 years of one-party rule under the PRI.

"Things definitely were not as bad under the PRI as they are for us now," said Pamela Gonzalez, 25, who is studying business administration in the capital.

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

NEEDS OPPOSITION BACKING

Calderon has lacked a majority in Congress since taking office in 2006 but more than ever he 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 Mexicans poor and spurred millions to cross the U.S. border in search of work.

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.

"Investment and exports are falling. It's a mess and it will be a long time before we recover," university professor Enrique Serrano, 51, said as he left a Mexico City polling station.

The centrist PRI will likely take first place in the lower house, doubling its number of seats to more than 210, leapfrogging the struggling left-wing opposition, and leaving the PAN in second place with 175 seats or less.

If the vote is close, the two parties are unlikely to produce major reforms in the next three years, said Allyson Benton of the Eurasia Group.

"The parties would likely continue to cooperate after the elections, even though the extent of this cooperation will be limited to producing only minor economic policy reforms," she said.

The PRI might be more willing to help Calderon with reforms if it wins big on Sunday, so as to get Mexico's economic house in order ahead of the 2012 presidential election.

All 500 seats in the lower house of Congress are on the table in Sunday's vote. Voters will also elect six state governors and hundreds of mayors.