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UPDATE 2-South Africa adds central bank row to economic and political troubles

troubles@

* Watchdog wants to axe cbank's mandate on currency, price

* Cenbank says plans to mount challenge watchdog in court

* Rand recovers after cenbank says to challenge watchdog (Adds central bank statement, rand)

JOHANNESBURG, June 20 (Reuters) - A major row in South Africa over the independence of its central bank escalated on Tuesday, with both sides trading barbs in a dispute over whether the bank should be more concerned about citizens and less about currency.

The issue -- triggered by a public watchdog's recommendation -- comes just as South Africa's economy has sunk into recession, its credit rating downgraded and politics is gripped by questions over President Jacob Zuma's stewardship.

Public Protector Busisiwe Mkhwebane, head of South Africa's constitutionally-mandated anti-graft watchdog, called on Monday for the central bank's mandate of maintaining currency and price stability be changed, saying the bank should act in the interests of empowering ordinary citizens.

Speaking on 702 Talk Radio on Tuesday, Mkhwebane she said the central bank's mandate was focused on a "few commercial interests".

South Africa's largest trade union and ally to the ruling African National Congress (ANC) Cosatu said on Tuesday that it backed Mkhwebane's position.

The Reserve Bank said in a statement that Mkhwebane's office had no business in making recommendations about how it is run.

"The Reserve Bank has consulted its legal team and has been advised that the remedial action prescribed by the Public Protector falls outside her powers and is unlawful," it said in a statement.

South Africa's banking industry lobby group backed the central bank. It urged the government to confirm the bank's independence.

The rand weakened as much as 1.6 percent on Monday after Mkhwebane recommendations, but on early Tuesday it had recovered some ground following the central bank's comments, trading 0.0025 percent firmer at 12.9900 per dollar.

South Africa is on the brink of prolonged economic downturn after data this month showed a second consecutive quarterly contraction to growth, with elevated political uncertainty sapping already weak business activity.

The country's credit rating was recently downgraded by all three major rating firms, with two of the top three agencies slashing Pretoria's debt into junk territory, all citing the risk of abrupt fiscal policy shifts following the sudden axing of finance minister Pravin Gordhan in March.

Gordhan, sacked by Zuma in what was seen as a political move, was a favourite among international investors.

Investors were already expressing concern about the central bank row.

"For a country grappling with political uncertainty and the medium-term need to reduce corruption and strengthen institutions, this is a worrisome development," Head of Emerging Markets Strategy at Societe Generale Jason Daw said in a note.

On Monday evening the bank's governor Lesetja Kganyago defended the mandate to keep inflation low and protect the value of the currency, saying it was supportive of economic growth. (Editing by James Macharia/Jeremy Gaunt)