KUALA LUMPUR, April 2 (Reuters) - Incoming Malaysian premier Najib Razak looks set to initiate aggressive political and economic reforms, but change could be slow and difficult as the country faces one of its toughest tests.

Najib, a British-trained economist, will become Malaysia's sixth prime minister on Friday, assuming the mantle as theeconomy enters its first recession in a decade and the government faces the prospect of losing power to a resurgent
opposition.

Outgoing premier Abdullah Ahmad Badawi handed in his resignation letter to the king on Thursday, following a tenure considered weak and ineffective by many.

"The handover and swearing in of the new Prime Minister will take place as scheduled on Friday," a high-level
government source told Reuters after Abdullah and Najib met the king separately on Thursday.

Falling foreign investment and racial tensions will push Najib to tackle corruption and review a race-based policy which has kept control of the economy in the hands of well-connected ethnic Malay tycoons.

"His major clear clarion call is a call for change from the politics to the economics side," said Zainal Aznam Yusof, a
member of a council that advises the premier on economic issues.

The 55-year old Najib has pledged to wean the economy off its reliance on low-end manufacturing, further open up the services sector and close a widening ethnic and religious divide.

Reform expected

A source told Reuters last week that Najib would name his cabinet within a week of taking office and radically reform state-linked firms to make them more profit-oriented.

But Najib has to drive reforms while trying to steer Asia's third most open economy through the headwind of slumping exports and rising unemployment.

A son of Malaysia's second prime minister and nephew of the third, Najib is regarded as a capable administrator who has been groomed for over three decades for the country's top job.

But his reputation has been sullied by allegations of corruption over a slew of defence deals and involvement in the
murder of a Mongolian model.

Najib has dismissed both claims as "malicious lies".

An immediate test would be three by-elections - one parliamentary and two state seats - on April 7.

The outcome of the polls would not alter the balance of power in parliament but it is still crucial after Najib led the
ruling coalition to defeats in two recent by-elections.

"If the National Front loses... it will show that the voters have not yet seen the changes that they expect, and that
they want the process of reform to continue," said political analyst Khoo Kay Peng.

Strong-arm tactics

As Najib wrestles with a resurgent opposition, there are fears of strong-arm tactics to stifle political dissent.

Last week opposition websites were barred from covering the annual meeting of the main political party. An opposition MP and a popular blogger have been charged with sedition, and two opposition newspapers have been banned.

"Najib is already blamed for quickly transforming the political atmosphere in the country to an increasingly gloomy
and darkening landscape, coupled with grave concerns about his suitability, integrity and legitimacy," said Lim Kit Siang, an opposition leader.

In the longer term, Najib has the tricky task of reviewing a decades-old policy favouring Malays in jobs, education and business without upsetting the main ruling party's power base.

"I don't think there is much appetite or political consensus to put into effect a radical reorientation of affirmative action," said Manu Bhaskaran, a partner at U.S. advisory Centennial.

"It would probably be better to iron out the weaknesses in the affirmative action programme, to tackle specific areas
where the weaknesses are particularly egregious in terms of the openings for corruption, for cronyism, for damaging, inefficient consequences.