By Jack Kim

SEOUL, Oct 28 (Reuters) - South Korean President Lee Myung-bak's ruling conservative party stands to avoid embarrassing setbacks in by-elections on Wednesday that could add momentum to economic reforms stalled in parliament.

Lee's support has climbed in recent months as South Korea has shown signs of being one of the first countries to emerge from the global slowdown, bolstered by GDP data this week showing the highest growth in 7 ½ years in the third quarter.

Two seats in capital region districts and three in rural areas were being contested as South Koreans say they are more upbeat about the economy than they have been in nearly eight years, according to a central bank survey.

Lee's reforms, designed to increase the competitiveness of Asia's fourth largest economy, have become bogged down in parliament in his second year in office. The measures include a tough labour bill and a budget aimed at easing out of a massive expansionary fiscal policy.

Hopes are high inside Lee's Grand National Party (GNP) that it will win at least two of the seats and avoid a repeat of the 0-5 shutout it suffered in April in the aftermath of protests against his policy to import U.S. beef.

'President Lee has done well with his middle-of-the-road, pragmatic policy plans and even a negative outcome (for the GNP) would not likely pressure him to drop them,' said Kim Il-young, political science professor at Sungkyunkwan University.

NO THREAT TO MAJORITY

The GNP has a solid majority in parliament and its hold on power is under no threat even if it loses all five races. Results are not expected until late on Wednesday or early on Thursday.

'The Grand National Party is the party to revive the economy,' party chief Chung Mong-joon said in last minute campaigning in a hotly contested district in Suwon on the outskirts of Seoul.

An election of even a single GNP candidate would end a long streak of losses by ruling party candidates in by-elections over the past several years when voters voiced discontent by choosing the left-leaning opposition.

Lee has established as a top policy priority job creation and a smooth exit from massive fiscal spending of the past year with an eye to pushing key reform bills through parliament.

Lee, a former construction boss, wants to change labour laws to allow employers to keep temporary workers longer to improve labour market flexibility and stop wage payments to workers who devote all their activities to union work.

The president also calls for corporate tax cuts. His budget proposal includes a project on green growth centered on rejuvenating the country's four major rivers, denounced by the opposition as a plan to pour concrete that will do more harm to the environment than good.

(Editing by Jon Herskovitz and Ron Popeski)

((jack.kim@reuters.com; Reuters Messaging: Jack.Kim.reuters.com@reuters.net; +822 3704 5645)) Keywords: KOREA POLITICS/

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