EMERGING MARKETS-Milei's setback sends Argentine markets tumbling ahead of October vote

By Pranav Kashyap and Twesha Dikshit

Sept 8 (Reuters) - Argentine markets slumped Monday after President Javier Milei's party suffered a stinging defeat in Buenos Aires province, injecting fresh uncertainty into October's make-or-break midterms.

The peso ARS=RASL hit a record-low, tumbling as much as 7.5%, and headed into uncharted territory, while stocks .MERV plunged more than 10% - headed for the sharpest daily drop since March 2020. U.S.-listed Argentine shares also dropped.

The country's international dollar bonds dropped as much as 6.8 cents, with the 2035 issue falling 6.1 cents to 67.57.

The opposition Peronist party triumphed in Sunday's legislative elections in the province, leaving the party of radical reformist Milei in a distant second place, the provisional official tally showed.

Argentina has seen its markets come under pressure in recent weeks. With corruption allegations swirling around Milei's inner circle, confidence gauges sinking, bonds and stocks selling off, and the unpegged peso demanding intervention, one of EM's boldest reform stories just met its toughest test yet.

"The elections in Argentina can pose significant market volatility. Magnitude of the gap was surprising, but going into the election, the risk was asymmetric given where prices had gone and obviously in the aftermath of the scandal," said Kathryn Exum, director and co-head of sovereign research & strategy at Gramercy Funds Management.

"Investors are waiting to get through the electoral period and then assess the kind of approach and ability to execute on the next phase of policy in the aftermath of the elections."

A gauge tracking Latin American stocks .MILA00000PUS fell 0.5%, while a similar gauge for currencies .MILA00000CUS slipped 0.1%.

Chilean equities .SPIPSA dropped 0.6% while the peso CLP= was flat after fresh data showed August inflation easing to the top of the central bank’s target band. With a two-day policy meeting starting Tuesday, the bank is widely expected to hold rates at 4.75% on Wednesday.

Santiago's equities - up over 36% year to date - have outpaced regional peers, helped by easier monetary policy and comparatively steady governance versus Brazil and Mexico. The central bank cut its benchmark rate for the first time this year in July.

Meanwhile, in Brazil, inflation measured by the General Price Index-Internal Availability (IGP-DI) index rose 0.2% in August, compared to a fall of 0.07% in the previous month, fresh data showed.

Brazilian equities .BVSP fell 0.2%, while the real BRL= slipped 0.3%.

Chinese President Xi Jinping called on BRICS countries to safeguard the multilateral trading system and resist all forms of protectionism as he addressed a virtual summit of the group, state media Xinhua reported.

Mexican stocks .MXX inched 0.1% lower and the peso MXN= firmed 0.2% ahead of August inflation data on Tuesday, seen at 3.58% year over year - within Banxico's 3%, plus or minus one percentage point target band. The central bank recently flagged sluggish growth and now expects inflation to run hotter than previously forecast through year-end.

Key Latin American stock indexes and currencies: