July 6 (Bloomberg) -- Mexican ruling party candidate Felipe Calderon built a 0.5 percentage point lead over rival Andres Manuel Lopez Obrador as electoral authorities neared the end of a recount of the country's closest-ever presidential election.

Calderon, the candidate from President Vicente Fox's National Action Party, took 35.86 percent of the July 2 vote while Lopez Obrador, the candidate from the Party of the Democratic Revolution, had 35.32 percent, based on 99.9 percent of ballots recounted by the Federal Electoral Institute.

``We are ahead in the presidential election and the rest of the polling places left to be tabulated are in favor of the National Action Party,'' Calderon told cheering supporters at his headquarters in Mexico City early this morning. ``You, my friends, can make your own conclusions.''

Mexico's peso surged as Calderon's lead widened, reversing a tumble yesterday sparked by concern that Lopez Obrador, who vowed to boost social spending to aid the poor, would win.

Lopez Obrador today said he would challenge the results in court, alleging ``irregularities'' in the process and will demand a recount of all ballots -- a more thorough review than the one that authorities are currently doing. He also called on his supporters to stage a rally in Mexico City over the weekend and said he'd provide evidence of irregularities at that rally.

`Irregularities'

``We can't accept these results,'' Lopez Obrador said today during a press conference in Mexico City. ``There are too many irregularities, not only yesterday, but in the whole process, too many inconsistencies.''

Mexico's electoral court has until the end of August to resolve any legal disputes and has until Sept. 6 to declare a winner in the election.

Last night, the two candidates alleged interference as the partial recount numbers that came in gave Lopez Obrador an initial lead. Calderon's campaign coordinator Juan Camilo said Lopez Obrador's party was trying to ``generate a false perception of the election results'' by slowing the recount in districts that Calderon won.

The institute posted results at its Mexico City headquarters throughout the evening and morning as recounted votes came in from across the country. Calderon took the lead early this morning.

A deputy from Lopez Obrador's party involved in the recount, Horacio Duarte, said authorities found ``thousands of votes'' in each state that hadn't been recognized in the preliminary count.

`Clean'

Preliminary results released July 3 has also showed Calderon ahead of Lopez Obrador -- by a margin of 402,708 votes, or about 1 percentage point. Both candidates claimed victory.

Electoral authorities rebuffed Lopez Obrador party's allegations of fraud and said there's no legal basis for them to carry out a vote-by-vote recount.

``These were clean and exemplary elections,'' Luis Carlos Ugalde, president of the electoral institute, said at a news conference yesterday. ``Certain things have come up as issues because of the tight margin.''

About 4,000 Mexican electoral workers and private citizens began reviewing tallies yesterday morning at 300 district stations across the nation. Their job is to recount votes one by one on all sheets with discrepancies. Each district has a 13- person board that plans to go over an average 434 tally sheets.

Excluded Votes

The institute's nine-member board was approved by the lower house of Congress in 2003. Lopez Obrador's party, the third- largest in the house at the time, withdrew from the selection process, alleging some of the members had partisan affiliations. The two biggest parties were the opposition Institutional Revolutionary Party and the National Action Party.

The institute generated criticism after saying on July 4 that it had excluded 2.58 million votes from the preliminary count because the tally sheets with those votes had inconsistencies such as illegible markings.

If included in the preliminary count, those votes would have narrowed Calderon's lead over Lopez Obrador to 257,532 votes, or about 0.6 percentage point, said Rene Miranda, the institute's coordinator for the preliminary count. Those votes would be included in the recount, authorities said.

The peso gained 1.6 percent today to 11.066 pesos to the dollar at 1:57 p.m. New York time, reversing a 1.6 percent tumble yesterday. Stocks and bonds also rose.

Calderon, 43, who dubbed himself the ``President of Employment,'' vowed to attract investment and create jobs by keeping free-trade policies and public spending restraints that have curbed inflation and lowered interest rates.

Lopez Obrador promised during the campaign to spend more on pensions and social programs and stop signing free-trade accords that he says only benefit the rich. His message resonated among millions of poor Mexicans -- especially those in the south of the country -- who can't afford housing, shoes, clothes or electricity.

To contact the reporter on this story: Thomas Black in Mexico City at tblack@bloomberg.net

Last Updated: July 6, 2006 13:58 EDT