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UPDATE 1-Brazil's Rousseff loses support but on track to win re-election

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RIO DE JANEIRO, March 27 (Reuters) - Popular support for Brazilian President Dilma Rousseff has faltered ahead of the Oct. 5 presidential election, a poll showed Thursday, but the leftist leader remains favored to win a second term.

Hurt by a sluggish economy, high inflation and a scandal surrounding Brazil's state-run oil company, Rousseff's personal approval rating has dropped to 51 percent from 56 percent in November, the survey by the Ibope polling institute and Brazil's National Industry Confederation showed.

Support for her administration fell to 36 percent from 43 percent in the previous poll, while 27 percent of those polled disapproved of the government, compared with 20 percent in November. The latest poll was taken from March 14-17 and has a margin of error of two percentage points.

The drop in support, which led to a sharp rally in Brazilian stocks and boosted the country's currency on Thursday, reflects the challenges that Rousseff must overcome to win re-election.

"It shows that 2014 is going to be a hard year for the government," said Rafael Cortez, a political analyst with Tendencias, a consultancy in São Paulo. "All these negative issues are hurting her image as a candidate."

Although Rousseff and her ruling Workers' Party still enjoy widespread support because of economic gains made during the administration of former President Luiz Inácio Lula da Silva, her mentor and predecessor, Rousseff is currently presiding over the fourth year of lackluster growth in Latin America's largest economy.

Price increases and a lack of investment in the country's public services led to mass nationwide demonstrations last year that have caused many voters to question the Workers' Party's 12-year grip on the presidency.

Some voters are also critical of the billions of dollars worth of public funds that have been spent on 12 stadiums for the 2014 soccer World Cup, which kicks off in São Paulo June 12.

Struggling businesses, meanwhile, have increasingly complained about what they perceive as the government's short-sighted and interventionist management of the economy. Rousseff has focused mostly on curbing costs through tax breaks and price controls, not the sort of structural reforms that economists have long argued are necessary to make Brazil more efficient.

Fueled by investor hopes that support for Rousseff could dwindle further, Brazilian assets, especially stocks of state-controlled companies, soared.

Brazil's benchmark Bovespa index rallied to its highest level in over two months and the real, strengthened 2 percent against the dollar.

Recently, Rousseff also has been roiled by the ongoing scrutiny of a 2006 purchase of an oil refinery in Texas by Petroleo Brasileiro SA, the state-run energy company known as Petrobras. As chairwoman of the company's board at the time, Rousseff approved the transaction, which is now being criticized as too costly.

Still, other recent polls suggest that Rousseff is still likely to win re-election.

An Ibope poll of voter intentions last week found Rousseff has 43 percent of the electorate's support, against 15 percent for Senator Aecio Neves of the main opposition party and 7 percent for Eduardo Campos, governor of the northeastern state of Pernambuco.

(Additional reporting by Jefferson Ribeiro and Eduardo Simões.; Editing by Brian Winter, Peter Galloway and Paul Simao)