Challenges for Ecuador's Correa in new term

QUITO, Aug 6 (Reuters) - Ecuadorean President Rafael Correa starts a second term in office on Monday facing the challenge of fulfilling his promise to social reforms but with an economy weakened by slumping oil prices.

Correa, a leftist allied to Venezuelan President Hugo Chavez, has unnerved investors by expanding the state's role in the economy. He has hiked taxes, defaulted on $3.2 billion in bonds and expelled foreign firms over tax or legal disputes.

A failure to bolster the economy hurt by declining oil output could jeopardize Correa's popularity in a country where popular protests have deposed three presidents in a decade.

Following are some of Correa's policy challenges:

OIL CONTRACTS: Correa says he is not considering nationalizing oil companies, but is instead negotiating service contracts with investors to boost state revenue. He wants companies to surrender profit-sharing oil extraction deals in exchange for flat-fee contracts.

Analysts say he needs a conciliatory approach to attract investment to reverse a decade-long slide in oil output, which now stands at 486,000 barrels per day.

Correa last month told Spain's Repsol (REP.MC), Brazil's Petrobras (PETR4.SA), France's Perenco and China's Andes Petroleum to pay hundreds of millions of dollars in back taxes over pipeline operations.

The government says it could rescind Perenco's oil extraction contracts by mid-August, also over a tax dispute.

DOLLAR CURRENCY: Ecuador adopted the U.S. dollar as its legal tender after a crippling financial crisis in 2000.

Although Correa and his top officials say they will not drop the dollar, analysts say he may reconsider if government dollar reserves run low because of falling oil prices and a potential lack of ready access to credit.

FINANCING: South American multilateral lenders are now Ecuador's main financing source after the government defaulted on foreign bonds, prompting international capital markets to turn their backs on the OPEC-member nation.

Ecuador recently lined up $2.5 billion in loans from regional multilateral lenders to tackle a liquidity squeeze, Correa said, including the Inter-American Development Bank, which has pledged $1.5 billion to the OPEC country.

A question is how much these sources will be willing to loan to finance Ecuador's 2010 budget.

MEDIA TENSIONS: Correa often calls journalists "rabid dogs" and "liars." He says he is considering issuing fines against media outlets, or even revoking the licenses of radio and TV networks because of irregularities. That could prompt international criticism over press freedoms.