By Gabriel Stargardter and Gustavo Palencia
TEGUCIGALPA (Reuters) - Honduras is heading for a close presidential vote on Sunday as the wife of an ousted leftist leader fends off a late surge from the ruling party heavyweight and both vow a crackdown on drug violence that has made the country the world's murder capital.
Xiomara Castro led in polls for much of this year before conservative National Party candidate Juan Hernandez, Honduras' most powerful politician, nosed ahead of her in late October.
Many privately tip Hernandez to win, but the contest remains too close to call and surveys put the two contenders in a statistical tie.
Castro's bid is widely seen as an effort by her husband and former president, Manuel Zelaya, to make a political comeback.
Zelaya was whisked out of his bed in a 2009 coup that plunged the Central American country into a deep political crisis.
The winner of Sunday's election will have to steady state finances, clean up a corrupt police force and fight drug gangs that have given the impoverished country the highest homicide rate in the world of more than 85 people per 100,000.
"I think it's in danger of becoming a narco-state, if it isn't already," said Mark Ungar, a former adviser to the Honduran police, who reckoned half the country's 18 states are controlled by drug traffickers.
The election will be decided by a simple majority. Analysts say a tight result could spark allegations of fraud and street protests. A clear winner and an opposition victory in Congres, on the other hand, could provide stability for reforms.
With the race so close, and no party likely to gain a majority, the need to forge political alliances should head off any risk of a repeat of 2009's coup.
TWO-HORSE RACE; PHOTO-FINISH?
Political novice Castro, who shot to fame when she marshaled support for her husband after his expulsion, has profited from widespread unhappiness at the feeble state of the Honduran economy and the violence it breeds.
Her toned-down version of Zelaya's leftist populism has resonated with voters who back her Liberty and Refoundation Party (LIBRE) - a coalition of leftist politicians, unions and indigenous groups founded by her husband - to break decades of corrupt bipartisan politics.
Known as "the Dauphin," National Party candidate Hernandez, the current head of Congress, is natural heir to President Porfirio Lobo, who is constitutionally barred from seeking re-election.
Third-placed Liberal party candidate Mauricio Villeda lags in the polls and is unlikely to close the gap.
Many expect Hernandez to win due to his party's political machinery, lingering suspicion of Zelaya and a divided left split between Castro and Villeda.
Hernandez has cast himself as the right man to square up to the Mexican cartels who have turned Honduras into a key staging point for moving Colombian cocaine to the United States.
Willing "to do whatever it takes to recover our peace and security," 45-year-old Hernandez advocates using a newly-formed militarized police force alongside the army to tame the drug gangs running riot in this country of about 8 million people.
The 54-year-old Castro says she wants to create a community police force and take soldiers off the streets, only using them on the border to intercept drug shipments.
Although she says she will be the one calling the shots, most experts agree a vote for Castro is a vote for Zelaya.
With nearly a million new voters - or just shy of 20 percent of the electorate - eligible to vote since the last election in 2010, there could be surprises in store on Sunday.
Across Honduras, hospitals are going without oxygen for routine operations while the prosecutor's office sometimes cannot afford to send detectives to crime scenes.
The violence has forced many of the country's assembly plants, a vibrant local economy, to move to Nicaragua.
Annual growth is not expected to reach 3 percent this year, down from 3.3 percent in 2012, said Roldan Duarte, President of the Honduran College of Economists, while the fiscal deficit will likely exceed 7 percent of gross domestic product (GDP). Public debt should come in at 41 percent of GDP, he said, double the 2008 level.
The devastating effects of roya, or leaf rust, which is set to destroy large swaths of Honduras' coffee crop, the region's largest, should apply more pressure to a yawning current account deficit the International Monetary Fund (IMF) projects to be 11.2 percent of GDP this year.
A roughly $200 million IMF credit deal expired in March 2012, with experts saying the organization was unwilling to throw good money after bad before a presidential election.
Duarte estimates Honduras hemorrhages 50 billion lempiras ($2.5 billion) a year through corruption, a figure equivalent to more than 10 percent of its total GDP.
Both Castro and Hernandez have signaled they will seek to strike a new deal with the IMF if elected. Neither has acknowledged the Fund's likely conditions: lower public salaries, a currency devaluation, a tax overhaul and the privatization of loss-making state utilities.
"I think the new government will be obliged to do it because they've got no other way out," said Duarte.
Observers say the outlook remains bleak for Honduras.
"Even in the best case, the election will not fix Honduras' problems," said U.S. Congressman Eliot Engel, a member of the House Foreign Affairs Committee. "Honduras' problems ... go to the deepest aspects of how any society organizes itself."
(Honduran law prohibits the publication of election polls in the days preceding the vote. Information relating to polls is for publication outside the country)
(Editing by Simon Gardner and Andrew Hay)