EMERGING MARKETS-Latin American currencies, stocks lose ground as dollar steadies

By Lisa Pauline Mattackal

Feb 24 (Reuters) - Indexes tracking Latin American currencies and stock were on track for their worst day in three weeks on Monday, as the dollar edged higher and investors assessed the likelihood and severity of potential U.S. tariffs ahead of a key deadline next week.

MSCI's index tracking Latin American currencies against the dollar .MILA00000CUS dipped 0.6%, eyeing its worst session in nearly three weeks. The stocks index .MILA00000PUS dropped 0.7%.

The Latam FX index has gained around 2.4% so far in February, while the gauge of regional stocks has gained about 1.7% as ebbing concerns about U.S. President Donald Trump's threatened tariffs have seen the dollar's rally run out of some steam.

Still, while many investors now gauge Trump's threatened tariffs as primarily a negotiation tactic, plenty of uncertainty remains. Delayed tariffs on Mexico and Canada are currently expected to go into effect on March 4.

The Mexican peso MXN=D3 dropped 0.4%, while stocks .MXX fell 0.4%.

"The direction of US protectionism will be the main driver beyond the short term, and we should see the discussion on Mexico and Canada tariffs return to center stage as the deadline for the delayed tariffs is a week away," analysts at ING said.

"Our working assumption is that Trump won't go ahead with 25% tariffs on his neighbors. However, a series of hawkish comments from Trump followed by a last-minute deal would be a familiar script, and we see downside risks for CAD and MXN before any reassurance on tariffs arrives."

Additionally, data showed Mexico's headline inflation hit 3.74% in the first half of February, in line with forecasts and still within the central bank's 2% to 4% target range, supporting expectations for another rate cut.

Most currencies in the region fell, led by a 0.7% drop in Chile's peso CLP= as copper prices slipped.

Argentina's Merval index .MERV rose 1.6%. The index has broadly recouped losses from last week's slump sparked by President Javier Milei's crypto scandal.

Elsewhere, the Bank of Israel kept short-term interest rates unchanged at 4.50%, as expected. The shekel ILS= edged down 0.1%, while stocks .TA125, .TA35 reversed early gains.

Brazil-listed shares of Azul AZUL4.SA jumped 8.3% after the airline posted fourth-quarter core earnings slightly above market expectations, while shares of Mexico's Volaris VOLARA.MX dropped 7.2% after its earnings report.

Citigroup upgraded both Indian and Chilean equities to 'Overweight' from 'Neutral'. Chile's main stock index .SPIPSA edged down 0.1%.

The brokerage remains neutral on EM equities in their global allocations citing risks of volatility on tariff news.

Meanwhile, Peru's economy minister said the country is expected to be Latin America's second fastest growing economy this year, projected to grow at 4%.

The rouble RUB= rose 0.4% against the dollar as investors continued to monitor discussions on the Russia-Ukraine war.

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Key Latin American stock indexes and currencies at 1500 GMT: