*

Brazil's industrial output up 0.1% in August after July

drop

*

Approval of Brazil's Lula slips ahead of local elections

*

Argentina budget cuts spark protests at universities

*

Polish cenbank leaves rates unchanged as inflation remains

high

By Ankika Biswas

Oct 2 (Reuters) - Most Latin American currencies fell on

Wednesday, as worsening Middle East tensions continued to dent

investors' risk appetite and boosted the safe-haven dollar,

while Israel's bonds slid and its default insurance costs

spiked.

Israel's international bonds fell more than 2 cents and the

country's default insurance costs rose to almost 12-year highs,

after another ratings downgrade and rising fears the Middle East

conflict will spread further.

The 2054 bond suffered the most, down 2.5 cents in the

dollar to bid at 92.64 cents, their lowest level since August,

Tradeweb data showed. Five-year credit default swaps jumped 10

basis points to 160 bps, their highest since November 2012.

In latest developments, Israeli forces pushed into South

Lebanon in a campaign against the Hezbollah armed group, a day

after Iran fired missiles at Israel.

"Financial markets have reacted as one would expect to the

heightened geopolitical tensions in the Middle East, with a bout

of risk aversion sweeping through asset classes," said Matthew

Ryan, head of market strategy at Ebury.

"The involvement of Iran in the conflict is a particularly

troublesome development for markets, with investors rightly

fearful that retaliation from Israel could disrupt global oil

supplies."

With the dollar index climbing to a near three-week

high, Latam currencies such as Chile's peso, Peru's sol

and Colombia's peso weakened between 0.2% and

0.5%.

However, Mexico's peso rose for the third straight

day, firming 0.8% against the dollar to a one-week high, also

boosted by a 2% jump in crude oil prices.

A poll showed Mexico's peso will recoup some losses in the

medium-term if the new government holds back from pressing more

controversial changes like a judicial reform that has eroded

market sentiment in recent months.

Claudia Sheinbaum was sworn in as Mexico's first female

president on Tuesday.

Further, Mexican central bank deputy governor Jonathan Heath

said in an interview that the nation's benchmark interest rate

should stay at its current level for longer.

Brazil's real also strengthened 0.2%.

Data showed Brazil's industrial production grew in line with

expectations in August, reversing some of the losses registered

in the previous month despite high interest rates.

Ratings agency Moody's upgraded Brazil's long-term issuer

and senior unsecured bond ratings to Ba1 from Ba2, leaving the

economy just one step away from regaining investment grade.

Argentina's public universities will hold a massive

demonstration on Wednesday, backed by unions and opposition

parties, to protest against sharp public spending cuts

implemented by President Javier Milei.

Elsewhere, Poland's central bank left interest rates

unchanged, as expected, saying inflation should return to its

target after the energy price shock fades.

HIGHLIGHTS:

** Brazil credit rating upgrade paves the way for reduced

risk premium, officials say

** Ghana inflation rises in September as food prices surge

** Approval of Brazil's Lula slips ahead of mid-term local

elections

Key Latin American stock indexes and currencies at 1500 GMT:

Equities Latest Daily % change

MSCI Emerging Markets 1187.79 1.3

MSCI LatAm 2273.56 1.78

Brazil Bovespa 134476.86 1.5

Mexico IPC 52262.29 -0.41

Chile IPSA 6438.64 -0.16

Argentina Merval 1728761.16 NULL

Colombia COLCAP 1312.86 0.44

Currencies Latest Daily % change

Brazil real 5.4235 0.24

Mexico peso 19.4403 0.84

Chile peso 908.48 -0.52

Colombia peso 4217.68 -0.19

Peru sol 3.7198 -0.41

Argentina peso (interbank) 970.5 -0.05

Argentina peso (parallel) 1200 2.92

(Reporting by Ankika Biswas in Bengaluru; Editing by Emelia

Sithole-Matarise)