*

Latam FX down 0.4%; stocks down 0.9%

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Colombia Senate approves labor reform package

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Mexico's stock index set for worst week in over three

months

(Updates with mid-session prices)

By Pranav Kashyap and Sruthi Shankar

June 20 (Reuters) - The Brazilian real lost ground on

Friday but still looked poised to notch its third straight week

of gains after a surprise interest rate hike earlier in the

week, while tumbling crude prices dragged down the Mexican peso.

The MSCI index of Latam currencies touched a

record high earlier this week, but choppiness in crude and

foreign exchange markets as a result of the Israel-Iran

conflict, particularly for the dollar, has weighed on sentiment

since.

The Mexican peso slid to a two-week low against the

dollar on Friday as Brent crude prices plunged nearly 3% after

the White House postponed a decision on U.S. involvement in the

ongoing conflict. Oil is a key export for Mexico.

Oil prices had soared almost 3% the day before after Israel

struck nuclear targets in Iran and Iran, OPEC's third-largest

producer, retaliated with missiles and drones. With both sides

showing no signs of de-escalation, markets remained on edge.

Mexico's IPC eked out a modest 0.4% gain, but still

looked set for its roughest week in almost three months.

Banxico faces a tough balancing act at next week's rate

meeting, as recent data showed inflation racing past its 3%

target. Beneath the surface, however, Mexico's economy only just

dodged a technical recession in the first quarter and now

grapples with sluggish domestic demand and jitters over U.S.

trade policy.

Meanwhile, Brazil's real edged down to 5.52 per

dollar as traders returned from a holiday, though it had briefly

touched an eight-month high of 5.47.

The currency's recent strength follows a surprise move by

Brazil's central bank, which hiked interest rates by 25 basis

points to 15%, its highest level since July 2006 and the seventh

consecutive increase.

The bank signaled that borrowing costs are likely to stay

elevated, challenging expectations that the tightening cycle was

over, as stubborn inflation and red-hot economic data keep

policymakers vigilant.

"We suspect that Brazil's central bank would probably only

deliver further hikes if the war in the Middle East lead to a

surge in oil prices or if the government loosens fiscal policy

significantly ahead of next year's election," said Kimberley

Sperrfechter, emerging markets economist at Capital Economics.

"The hawkish commentary is probably aimed at preventing

investors from pricing in rate cuts."

Sao Paulo's benchmark index tumbled 1.2%, on track

for its sharpest daily drop in nearly a month.

Meanwhile, Colombia's peso and stocks in Bogota

were flat as markets digested the Colombian Senate's

approval of a revised, much-debated labor reform package.

Facing sluggish tax revenue, high debt, and limited options

to cut spending, Colombia's central bank is widely expected to

keep interest rates unchanged in its meeting next week.

Key Latin American stock indexes and currencies:

MSCI Emerging Markets 1189.04 1

MSCI LatAm 2259.19 -0.88

Brazil Bovespa 137097.82 -1.17

Mexico IPC 56307.96 0.43

Argentina Merval 2064098.6 0.639

5

Chile IPSA 8077.48 -0.12

Colombia COLCAP 1651.54 -0.09

Brazil real 5.522 -0.56

Mexico peso 19.1664 -0.74

Chile peso 940.54 -0.09

Colombia peso 4082.5 -0.06

Peru sol 3.6 -0.31

Argentina peso (interbank) 1165 -1.93

Argentina peso (parallel) 1180 0.85