* Brazil 12-month inflation eases in February

* Colombia improves 2026 fiscal deficit target

* EMs turn to measures to grapple with oil spike

(Updates with late afternoon trading)

By Pranav Kashyap and Purvi Agarwal

March 12 (Reuters) - Most Latin American currencies and

stocks extended their fall on Thursday as investors wrestled

with the inflationary fallout of the Middle East conflict, while

Chile adjusted to a major political shift following its

presidential election.

A gauge tracking regional equities slumped

3.8%, while a similar index for Latin American currencies

slipped 1.4%, as safe-haven appeal lifted the

dollar.

Oil prices remained in the spotlight after Iran's new

Supreme Leader Mojtaba Khamenei vowed to keep the crucial Strait

of Hormuz closed, even as the world faced the largest-ever oil

supply disruption, per the International Energy Agency.

India invoked emergency measures to tackle supply shortages,

Poland turned to financial tools to soften the blow, and Brazil

scrapped taxes on diesel and imposed levies on oil exports.

"You see markets beginning to price in a potential

de-escalation and then starting to price in total uncertainty on

a longer-term, we'll have volatility until we have clarity,"

said Malcolm Dorson, head of EMs at Global X ETFs.

Separate data showed Brazil's 12-month inflation slowed in

February to its lowest level in almost two years, putting the

central bank in a tough spot as oil prices continue to rise.

Investors had been betting on a rate cut next week - Brazil's

first since 2024.

The real weakened 1.7%, while stocks fell

2.5%, swept up in a wave of global risk-off moves.

"They might approach it with a more tepid start... with 25

basis points instead of 50 because higher energy prices could

put pressure on inflation," Dorson said.

"It's an election year, I think rates should be coming down

roughly 300 bps before November."

Oil's jump above the $100-a-barrel mark revived a familiar

fear that has stalked markets since the Middle East conflict

began: a fresh energy shock, especially for import-dependent

economies, as it could broaden into inflation pressures.

Chilean assets also came under pressure. The peso was

down 2.2%, leading declines among peers, and stocks in Santiago

dropped 1%. Yields on the country's 10-year bond

hovered near their highest levels since November.

Jose Antonio Kast was sworn in as Chile's president on

Wednesday, marking the country's sharpest shift to the right in

decades. He has pledged to lift economic growth through

deregulation, spending cuts and market-friendly policies.

In Colombia, the finance ministry improved its 2026 fiscal

deficit target, aiming at a smaller share of gross domestic

product than previously planned.

Colombia's peso appreciated 0.7%, an outlier among

peers. Local stocks, however, plunged 3.5%.

Argentina's monthly inflation rate was 2.9% in February,

stable from January but a tick above analysts' forecast of 2.7%.

Turkey, Iran's neighbor, underscored those concerns when it

halted its easing cycle once again and left its key interest

rate unchanged at 37%, citing the inflation risks stemming from

the war's market fallout.

Stocks in Istanbul closed 0.7% higher, while the

lira slipped 0.1%.

Key Latin American stock indexes and currencies:

Latin American market

prices from Reuters

MSCI Emerging Markets 1488.65 -1.83

MSCI LatAm 2973.76 -3.83

Brazil Bovespa 179391.27 -2.49

Mexico IPC 66138.56 -2.1

Chile IPSA 10399.64 -1.0

Argentina Merval 2704834.6 -2.38

9

Colombia COLCAP 2195.64 -3.5

Brazil real 5.2425 -1.66

Mexico peso 17.8416 -1.01

Chile peso 915.71 -2.22

Colombia peso 3677.5 0.73

Peru sol 3.4478 -0.81

Argentina peso (interbank) 1394.5 0.04

Argentina peso (parallel) 1400 -0.36