(Adds Lula comments, previous SAO PAULO)

RIO DE JANEIRO, July 2 (Reuters) - The Brazilian government will spend $1.7 billion to bring running water and other basic services to Rio de Janeiro slums to counter drug gangs that control many of the poor areas, President Luiz Inacio Lula da Silva said on Monday.

"If the state doesn't fulfill its role and does not provide (adequate) conditions for the people, drug traffickers and organized crime will," Lula said days after clashes between police and gangsters killed 19 people in one slum.

"So we want to compete with organized crime, and we are sure that we will beat it when we manage to bring benefits to the poorest places," he said at a meeting with auto workers in Sao Bernardo do Campo, an industrial suburb of Sao Paulo.

Rio is notorious for its violent slums, which give it one of the highest murder rates in Latin America. Over a million people in the city of 11 million live in shantytowns, or favelas, which often lack basic services.

Rio state security chief Jose Beltrame said last week slum residents were "at the mercy of a parallel state, where criminals dictate their will." He pledged more police raids to combat drug traffickers.

Human rights groups criticize the military-style raids and call for city services to be brought to the slums, and education and jobs for its residents.

In a another speech later on Monday in Rio de Janeiro, Lula called for a tough police stance against drug gangs.

"There are people who think it's only possible to confront crooks with rose petals, throwing talcum powder. We have to confront (gangs) knowing that many times they are better prepared than the police, with more modern guns that the police," Lula said, speaking next to Rio de Janeiro Governor Sergio Cabral.

Lula signed an agreement with Rio de Janeiro state government to spend more than 3.5 billion reais ($1.7 billion) in running water, sewage and other facilities in favelas and other poor areas, among them the sprawling Alemao shanty-town complex, the scene of last week's bloodshed.

The federal government will provide 2.15 billion reais ($1.1 billion) from its coffers and another 1 billion reais ($520 million) in financing. The projects should benefit around 2 million families in Rio de Janeiro state.

The state and municipalities will contribute anther 640 million reais ($330 million).

AlertNet news is provided by