ANALYSIS-Calderon's Party Reeling after Mexico Vote Rout

* Ruling PAN has worst result in key state for 24 years

* Several recent probes into PRI officials launched

* Calderon running out of time to turn fortunes around

By Dave Graham

MEXICO CITY (Reuters) - President Felipe Calderon's crushing defeat in weekend state elections has badly hurt his party's hopes of retaining power in 2012, setting the scene for a rough campaign designed to thwart the main opposition party.

Calderon's conservative National Action Party, or PAN, trailed way behind in third place in Sunday's election for governor in the State of Mexico, the country's most populous state.

The vote was a major victory for the centrist Institutional Revolutionary Party (PRI), a bitter rival of the PAN which ruled Mexico for most of the 20th century and is looking to return to power at the next presidential election in July 2012.

Bogged down in a bloody war against powerful drug cartels, Calderon's popularity has been in steady decline, and analysts said the rout in the State of Mexico shows that he and his party are in serious trouble.

"Calderon has been a lame duck without really knowing it for the last year or more. And he's close to being a dead duck now," said George W. Grayson, an expert on Mexican politics at the College of William & Mary in Virginia.

The PAN's share of votes in the 15 million-strong state flanking the capital plunged by half to 12.5 percent, while the PRI candidate stormed home with more than 62 percent. It was the PAN's worst showing in the state since 1987.

Compounding the PAN's misery, the PRI cemented its hold on two other states, Coahuila and Nayarit in Sunday's elections.

The night's big winner was Enrique Pena Nieto, the 44-year-old outgoing governor of the State of Mexico who is expected to be the PRI's presidential candidate next year.

The PRI's huge margin of victory in the State of Mexico -- winning three times as many votes as the second-placed leftist Party of the Democratic Revolution, or PRD -- was seen as a tribute to Pena Nieto, who campaigned hard for the winner.

With reforms stalled and his own approval ratings touching record lows, one of the few options left to Calderon is to train his fire on the PRI, whose 71-year rule of Mexico until 2000 was tainted by corruption and election fraud.

Analysts say the campaign against the PRI has already begun with authorities launching criminal probes into several senior PRI officials in recent weeks.

"There are lots of people with cases to answer in court, but they're choosing to go after those with clear ties to the PRI," said Jorge Schiavon of the CIDE think tank in Mexico City.

Calderon's government ended up with egg on its face last month when Jorge Hank Rhon, a prominent PRI politician and former mayor of Tijuana, walked free just days after he was arrested on weapons charges.

BLOCK THE PRI

The PAN pledged to revitalize Mexico when it ended PRI rule in 2000 but critics say it has failed to reform corrupt public institutions or close the gap between rich and poor. Calderon's defenders argue the political stranglehold the PRI still holds in much of Mexico has made this nearly impossible.

The the PRI has blasted Calderon for the drug war violence that has killed 40,000 people since he took office in late 2006. The daily grind of killings has taken a toll on the PAN with security now above the economy as voters' top concern.

"There's a sense of a president stuck in the trenches, struggling to turn things around on the economy, politically or in terms of public security," said John Ackerman, a political scientist at the National Autonomous University of Mexico.

With less than a year to go before the July 1, 2012 election, Calderon is running out of time to turn the tide.

His reform agenda has been stifled by PRI dominance of the lower house of Congress and despite the capture of numerous drug bosses, the most powerful capo remains at large.

Killings and disappearances in the drug war have become so acute that the president last month apologized to victims in a meeting broadcast live on national television in which angry parents berated him for several hours.

The fact the PRI has benefited from the chaos would rankle particularly with Calderon, said Grayson at William & Mary.

"Calderon is obsessed by the prospect of the PRI coming back. He started off as a real PRI hater when he entered Congress in 1991. When he walked down the aisle he would not go near the PRI, much less shake hands or slap backs," he said.

"So I'm sure he's got his own people thinking, 'What can we do to block the PRI's return?"', Grayson added, noting that Calderon might even throw his weight behind the PRD in 2012 to deny the PRI if it became obvious the PAN could not win.

Government attacks against the PRI run the risk of foundering against its formidable political machinery, with which it controls of nearly two-thirds of Mexico's states.

With every passing day, more and more of that machinery is lining up behind Pena Nieto, while the PAN has no clear favorite to succeed Calderon, who cannot seek re-election.

None of this augurs well for Calderon's party, said Sergio Aguayo, a political scientist at the College of Mexico.

"It's another symptom of the PAN's weakness," he said of the election results on Sunday. "It's in the worst shape of all heading into 2012 because its candidates are very weak."

(Additional reporting by Anahi Rama, Miguel Angel Gutierrez and Krista Hughes; Editing by Kieran Murray)