EMERGING MARKETS-Latam markets falter as US tariff concerns linger ahead of deadline

Updates to mid-session trading

By Lisa Pauline Mattackal and Purvi Agarwal

Feb 24 (Reuters) - An index tracking Latin American currencies was on track for its worst day in three weeks on Monday and stocks were lower as 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 since early February. The stocks index .MILA00000PUS dropped 1.1%.

The Latam FX index has gained around 3% so far in February, while the gauge of regional stocks has gained about 2.4% as ebbing concerns about U.S. President Donald Trump's threatened tariffs have caused the dollar's rally to lose some steam.

Most investors increasingly look at Trump's tariffs as a mostly negotiating tactic, but still, uncertainty around their materialization has kept investors nervous.

Mexico and Canada are expected to intensify efforts on border security and curbing fentanyl trafficking this week to avoid punishing 25% tariffs on their exports to the U.S., the deadline for which stands at March 4.

"Our working assumption is that Trump won't go ahead with 25% tariffs on his neighbors. However, a series of hawkish comments 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," said analysts at ING.

On the other hand, Thierry Wizman, Global FX & Rates Strategist at Macquarie said, "with the contours of a broader US-Mexico agreement coming into place perhaps earlier than expected, and with formal negotiations over the tariff issue too, we're getting more constructive on the MXN."

The Mexican peso MXN= and stocks .MXX were flat. 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 0.5% drop in Colombia's peso P=>. The Brazilian real BRL= was down 0.3%.

Among stocks, Argentina's Merval index .MERV reversed early gains and was last down 0.7%.

Brazil's Bovespa .BVSP fell 1.2%, despite a 4.7% gain in Brazil-listed shares of Azul AZUL4.SA after the airline posted fourth-quarter core earnings slightly above market expectations, while Mexico's Volaris VOLARA.MX dropped 11.2% after its earnings report.

Colombia's COLCAP .COLCAP gained 1%, outperforming peers.

Elsewhere, the Bank of Israel kept short-term interest rates unchanged at 4.50%, as expected. The shekel ILS= edged down 0.2%, while stocks .TA125, .TA35 reversed early gains.

Citigroup upgraded both Indian and Chilean equities to 'overweight' from 'neutral.' 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 0.9% 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 1950 GMT: