MEXICO CITY (Reuters) — The Mexican government announced the closure of the inefficient state-owned company that supplies electricity to Mexico City and its surrounding area on Sunday, a move that could trigger labor strife.

Preparing for trouble, riot police occupied installations of Luz y Fuerza del Centro (LFC) on Saturday night ahead of a decree ordering its absorption by the Federal Electricity Commission, Mexico’s main state power utility.

President Felipe Calderon has singled out LFC in recent weeks as a prime example of what is wrong in Mexico’s public sector.

The government said it was shutting the utility because of its inefficiency and massive operating losses that cost it almost as much as Mexico’s army.

“It is necessary to liquidate a company that has created a gap in public finances at a time when the international crisis ... is forcing us to take steps to deal with fundamental priorities, like poverty, healthcare and public security,’’ Interior Minister Fernando Gomez Mont told reporters.

Keeping LFC running has represented a growing fiscal burden, especially as Calderon’s government pushes for an austere budget that will raise energy costs and taxes next year to offset lower oil production.

Finance Minister Agustin Carstens told reporters it will cost about 20 billion pesos ($1.5 billion) to shut down the utility and pay off its 47,000 employees.

Union leaders promised widespread protests. Thousands of workers gathered in the capital as union spokesmen called for support from labor groups across Mexico.

LFC’s cost base has been swelled by a huge workforce and a generous retirement scheme. Also, the government said the utility loses a third of its electricity to technical problems and theft.

The Mexican Electrical Workers Union has long resisted efforts to boost efficiency and defends current LFC employment levels.

“The organization is prepared to resist this attack,’’ said union leader Humberto Montes de Oca. “The presidency wants to govern with stick in hand.’’

Despite regulated electricity tariffs, Mexican businesses pay some of the highest power rates in Latin America, according to the World Bank.

The government budgeted 42 billion pesos ($3.2 billion) to cover LFC’s losses in 2009, nearly as much as was allocated to the army, which is locked in a brutal war with drug cartels.

Calderon has warned that all state companies must improve their books. Last month he fired the head of state oil monopoly Pemex amid frustration with its poor performance.

LFC’s clients suffer from frequent power interruptions and changes in voltage levels. Customers’ accounts are still kept in paper files and delays in resolving billing problems are frequent.

Power fluctuations can damage industrial plants and lead to lost production, forcing companies to invest in special equipment to protect machines from power surges and blackouts.