* Brazil stocks on track for sharpest monthly drop in

three years

* Colombia heads to election over the weekend

* Mexico-US trade negotiations watched

* MSCI LatAm FX up 0.06%, stocks down 0.5%

(Updates with afternoon levels)

By Purvi Agarwal and Ragini Mathur

May 29 (Reuters) - Most Latin American assets eased on

Friday as investors locked eyes on a potential U.S.-Iran peace

deal, balancing cautious geopolitical optimism against a

backdrop of domestic losses led by Brazil.

MSCI's index tracking LatAm currencies was

flat, but it was poised for marginal monthly gains. In contrast,

the broader equities index was on track for its

sharpest monthly retreat since late 2024.

Investors remained on edge as they awaited a crucial

decision from U.S. President Donald Trump on a proposed deal

with Iran. The potential agreement, which would extend a

temporary ceasefire, hinges on reopening the strategic Strait of

Hormuz and dismantling Tehran's nuclear capabilities.

"Investors appear quite sanguine over the ongoing war

between the U.S. and Iran, convinced that it will soon be over,"

said David Morrison, senior market analyst at Trade Nation.

"The only question will be: has the war made the situation

better or worse for the world overall."

While the three-month-old conflict initially battered stocks

and sent both crude oil and the U.S. dollar soaring, mounting

hopes for a diplomatic breakthrough have helped global markets

climb back from their war-driven March lows.

POLITICAL AND FISCAL FEARS DRAG DOWN BRAZIL

On Friday, the Brazilian real was flat against the

U.S. dollar, but it was poised for its worst monthly performance

of the year. Domestic stocks also slipped 0.7% to cap

their steepest monthly plunge since February 2023.

Data showed that Brazil's economy rebounded in the first

quarter of 2026, buoyed by robust household consumption and

stronger capital investment.

However, a tight labor market and ongoing government

stimulus have complicated the central bank's outlook, clouding

the prospects for imminent interest rate cuts.

Brazilian assets were shaken this month by reports linking

right-wing challenger Flavio Bolsonaro to a disgraced banker - a

scandal that threatens his momentum against incumbent President

Luiz Inácio Lula da Silva, who currently leads the polls.

Investors remain deeply concerned over Brazil's

deteriorating public finances under Lula, despite recent efforts

by his administration to curb spending.

MEXICO EYES TRADE TALKS, COLOMBIA RALLIES ON ELECTION POLLS

Mexico's peso and benchmark stock index fell

0.3% and 0.8%, respectively, as trade talks with Washington

began. The U.S. is demanding stricter rules of origin for

Mexican-built vehicles, prompting Mexico's central bank to trim

its growth forecast due to investment uncertainty.

Colombia was a rare bright spot, with stocks

pacing for their best week since mid-January, rising 1.6% on

Friday. Momentum shifted after a weekend poll showed right-wing

candidate Abelardo De La Espriella tied with leftist rival Iván

Cepeda ahead of the May 31 election.

"Investors have welcomed de la Espriella's recent momentum -

that's not surprising given the starkly different views on how

to address Colombia's fiscal challenges," said Kimberley

Sperrfechter, senior EM economist at Capital Economics.

Cepeda had vowed to continue current President Gustavo

Petro's policies, while De La Espriella proposed to offer

incentives for private investors and boost commodity sectors.

Key Latin American stock indexes and currencies:

Stock indexes

Latest Daily % change

MSCI Emerging Markets 1751.26 1.54

MSCI LatAm 3034.23 -0.48

Brazil Bovespa 173851.02 -0.69

Mexico IPC 68311.33 -0.81

Chile IPSA 10918.82 0.19

Argentina MerVal 3163488.88 2.4

Colombia COLCAP 2217.27 1.59

Currencies Latest Daily % change

Brazil real 5.0419 -0.05

Mexico peso 17.3539 -0.27

Chile peso 889.46 0.19

Colombia peso 3702.02 -1.82

Peru sol 3.4023 0.08

Argentina peso 1,406.0 0.28

(interbank)

Argentina peso 1,410.0 1.4

(parallel)