By Ana Isabel Martinez

MEXICO CITY (Reuters) - The favorite to win Mexico's presidential election this July said on Wednesday the country must favor local investors over foreign competitors in strategic sectors of the economy, including telecommunications.

Enrique Pena Nieto of the opposition Institutional Revolutionary Party, or PRI, was responding to questions from reporters about government proposals to allow foreign companies unfettered access to the country's communications sector.

"I think domestic investment should be favored here in strategic areas such as telecommunications," Nieto said.

But he added that he was in favor of competition in all areas of a country where analysts say economic control is often concentrated in a few hands.

Pena Nieto has said if elected, he would open up the state-owned oil sector to more private investment.

Mexico allows 100 percent foreign involvement in its cell phone industry, but limits it to 49 percent in other areas.

Mexican tycoon Carlos Slim, the world's richest man, dominates the country's telecom sector - especially its cell phone market, where his companies account for more than three-quarters of all subscribers.

The country's competition watchdog has blocked a $1.6 billion telecom deal that would have linked the empires of two of the country's other richest men, one of the companies said on Wednesday.

That proposal would have brought together the interests of media tycoons Emilio Azcarraga, who owns Televisa, and Ricardo Salinas, who owns telephone company Iusacell as well as Mexico's second broadcaster TV Azteca.

Nieto remains comfortably in the lead ahead of July's ballot, although his support slipped by 2.6 percentage points in the first poll of the year after a series of public gaffes.