* Polls show election race too close to call
* Election has become referendum on FARC peace talks
* Both candidates are market friendly (Adds polls open, voter quotes)
By Julia Symmes Cobb
BOGOTA, June 15 (Reuters) - Colombians were voting on Sunday in the tightest presidential election in decades, a contest that will decide if the nation moves ahead on peace talks with Marxist FARC rebels or step up its battlefield offensive to end a 50-year war.
President Juan Manuel Santos, who has cast the election as a choice between peace and war, faces right-wing challenger Oscar Ivan Zuluaga, a sceptic of talks, who nudged ahead of the incumbent in last month's first-round ballot.
The candidates are locked in a race that polls show is too close to call and may have the narrowest margin for 20 years.
Santos, 62, began talks in 2012 with the Revolutionary Armed Forces of Colombia (FARC) to end a conflict that has killed over 200,000 people and displaced millions. He has made the pursuit of peace the centerpiece of his campaign.
He announced this week that preliminary talks had begun with the nation's second biggest insurgent group, the National Liberation Army.
"Voting for Santos is the last chance we have for peace," said Felipe Canes, 43, a hotel owner, after casting his vote at a Bogota secondary school.
Zuluaga, 55, who accuses Santos of negotiating with terrorists, will impose new conditions on the drug-funded FARC like prison terms for serious crimes and a ban on political participation, should he win.
His vow to suspend peace talks after taking office helped win over hard-line opponents of the negotiations, but he softened that stance after his first-round victory in an apparent effort to attract moderate voters.
The election is unlikely to have much market impact because Santos and Zuluaga, both former finance ministers, hold similar pro-business views. Each wants to encourage foreign investment and improve mining infrastructure.
The rebels have said they will not go to jail and refuse to down their weapons until a peace deal is signed. Santos' backers fear the talks, which have reached partial agreements on three of five points, will collapse if Zuluaga wins.
Other Colombians, weary of previous failed attempts to reach peace, say a return to the hard-line policies espoused by Zuluaga and his mentor, ex-president Alvaro Uribe, is the only way to defeat the FARC and get justice for victims.
"Peace is not what our president is creating," said Jose Vicente Caro, 46, a doctor. "Peace is health, education, employment, not a signature" on a peace deal, he said.
Zuluaga won 29.3 percent of the first round vote, while Santos got 25.7 percent. Three other candidates were eliminated following the first round.
Uribe, who remains popular with voters and is considered a political king-maker, once backed Santos, who served as his defence minister, but the two fell out over the negotiations.
The former president has said the talks are a betrayal of Colombians and that a deal could allow rebel leaders, many of whom are wanted for war crimes or drug trafficking, to escape prosecution and be offered seats in congress. (Reporting by Julia Symmes Cobb; Editing by Helen Murphy, Bernard Orr and Raissa Kasolowsky)