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EMERGING MARKETS-Mexico peso rallies after key state vote; Brazil real drops

SAO PAULO, June 5 (Reuters) - The Mexican peso firmed to its strongest level in seven months on Monday after the ruling party fended off a leftist challenge in a key state election, reducing expectations of a defeat in the presidential elections next year. The Institutional Revolutionary Party (PRI) looked set to maintain its nine-decade hold over the central State of Mexico, the country's most populous, with a narrow lead over the leftist National Regeneration Movement (MORENA). A defeat in the state would be seen as a blow to PRI's 2018 presidential campaign, strategists at BNP Paribas wrote in a note to clients. Still, the results are far from an early victory, with polls showing Andres Manuel Lopez Obrador, a contender for MORENA, as the front-runner. A Nomura Securities poll with 87 clients on March 30 indicated the Mexican peso could weaken 3.4 percent in the case of a MORENA victory. On Monday, the peso strengthened as much as 2 percent to the strongest since Nov. 9, after the surprise election of U.S. President Donald Trump. In contrast, the Brazilian real weakened 1 percent ahead of a key electoral court decision on Tuesday that could oust President Michel Temer, whose ambitious reform agenda has helped rekindle investor confidence. A former lawmaker and close aide to Temer was arrested on Saturday as part of a corruption probe that also targets the president, adding to calls for his ouster and fueling investor concerns over potential delays to the implementation of structural reforms.

Key Latin American stock indexes and currencies at 1615 GMT:

Stock indexes daily % YTD % Latest change change MSCI Emerging Markets 1017.02 0.19 17.72 MSCI LatAm 2532.68 -0.51 8.76 Brazil Bovespa 62338.82 -0.27 3.51 Mexico IPC 49363.47 0.09 8.15 Chile IPSA 4881.90 -0.35 17.60 Chile IGPA 24476.38 -0.33 18.05 Argentina MerVal 22425.60 -0.41 32.56 Colombia IGBC 10702.68 0.2 5.67 Venezuela IBC 78288.69 0.19 146.93 Currencies daily % YTD % change change

Latest

Brazil real 3.2864 -1.01 -1.13 Mexico peso 18.3655 1.77 12.95 Chile peso 668.5 0.15 0.33 Colombia peso 2893.65 -0.09 3.73 Peru sol 3.27 0.06 4.40 Argentina peso (interbank) 16.0450 -0.22 -1.06 Argentina peso (parallel) 16.26 0.37 3.44

(Reporting by Bruno Federowski; Editing by Frances Kerry)