(Updates with afternoon trading)

*

LatAm stocks down 0.3%, FX down 0.19%

*

Brazil manufacturing sector contraction deepened in August

*

Chile's economic activity rose 1.8% in July

By Pranav Kashyap

Sept 1 (Reuters) - Latin American assets gave up early gains and traded lower on Monday, with investors turning cautious as they assessed local indicators and awaited U.S. labor data this week that could guide global monetary policy.

The MSCI gauge for Latin American stocks fell 0.3%. A parallel gauge for currencies lost 0.19%.

Brazilian equities fell 0.25%, on course to snap their three-day streak of gains, and the real currency lost 0.27% after the contraction in Brazil's manufacturing sector deepened in August, PMI data showed, as U.S. tariffs and tight domestic policy weighed on industrial activity.

The data precede Tuesday's second-quarter GDP report, which is expected to show growth slowing to 0.3% from 1.4% in the first quarter due to a pullback in farm output and softer industrial production.

The estimates indicate that a restrictive monetary policy, aimed at cooling inflationary pressures in Latin America's No. 1 economy, was beginning to weigh.

Meanwhile, the dollar index hit a five-week low as investors looked ahead to a raft of U.S. labor reports due this week, particularly non-farm payrolls numbers.

According to the CME FedWatch tool, traders have priced in around a 90% chance of a 25 basis-point rate cut by the U.S. Federal Reserve later in September.

"We have seen softening but not a collapsing U.S. economy," said Andres Abadia, chief LatAm economist at Pantheon Macroeconomics, but he noted that markets are grappling with uncertainty over the Fed's future leadership and whether that could translate into a more dovish policy stance.

"Everything that happens in the U.S. economy has a collateral effect on Latin economies."

Mexico's peso was trading flat against the dollar, while the country's main index steadied after data showed Mexico's manufacturing activity expanded in August, its first expansion in over a year.

Trading volumes were lighter than usual due to a U.S. holiday.

Chilean stocks rose 0.22% after data showed the country's economic activity rose 1.8% in July, in line with market forecasts.

Fresh figures come as traders weigh the central bank's next move following an upside surprise in inflation. With July inflation overshooting and the annual rate drifting further from the 2%-4% target, attention shifts to the September 9 policy decision. The local peso fell 0.22% on Monday.

The Colombian peso lost 0.22%, while stocks in Bogota were flat. The country reports its inflation figures on Friday.

Peru's sol dipped about 0.1% as monthly consumer price inflation fell 0.29% in August for the Lima metropolitan area.

Stocks in Argentina dropped 2.5% to a near five-month low, taking their yearly decline to over 22% so far. The peso fell about 2%.

Elsewhere, Russian President Vladimir Putin proposed that members of the 10-nation Shanghai Cooperation Organisation should sell joint bonds.

Key Latin American stock indexes and currencies:

Stock indexes Latest Daily % change

MSCI Emerging Markets 1266.57 0.65

MSCI LatAm 2392.63 -0.3

Brazil Bovespa 141065.92 -0.25

Mexico IPC 58714.93 0.01

Chile IPSA 8919.58 0.22

Argentina MerVal 1934606.14 -2.53

Colombia COLCAP 1845.09 -0.03

Currencies Latest Daily % change

Brazil real 5.4444 -0.27

Mexico peso 18.6473 -0.03

Chile peso 968.09 -0.22

Colombia peso 4016.3 -0.22

Peru sol 3.5346 -0.08

Argentina peso 1,375.5 -1.96

(interbank)

Argentina peso (parallel) 1,350.0 -0.37