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UPDATE 1-IMF approves smaller $61 billion credit line for Mexico

(Adds comments from Mexico's finance ministry, background)

WASHINGTON, Nov 25 (Reuters) - The International Monetary Fund said on Monday its executive board had approved a smaller two-year lending arrangement for Mexico worth $61 billion, replacing the current flexible credit line of about $74 billion.

It said the new arrangement would bolster market confidence at a time when trade uncertainty, a sharp pullback in capital from emerging markets and increased risk premiums posed continued external risks to the Mexican economy.

The Mexican government intended to continue to treat the arrangement as "precautionary" and planned to request further reductions in the credit line as external risks receded, IMF Deputy Managing Director David Lipton said in a statement.

Mexico's economy has been buffeted by uncertainty over the past three years due to the threat of trade wars with U.S. President Donald Trump, and the credit line is viewed as an important stabilizer for its financial markets.

Mexico's finance ministry hailed the arrangement.

"The decision of the (IMF's) executive board underscores that Mexico continues to meet all the qualification criteria needed to access, if required and without any conditions, the resources available through this instrument," it said.

The IMF's new managing director, Kristalina Georgieva, said last month the organization would remain a "strong partner" of Mexico, following meetings with the heads of the Mexican finance ministry and central bank.

The IMF has recommended Mexico reconsider its position of limiting private companies' cooperation with state-owned oil company Pemex, whose debt is weighing heavily on the government's finances. (Reporting by Andrea Shalal in Washington; Additional reporting by Anthony Esposito in Mexico City; Editing by Matthew Lewis, David Clarke and Tom Brown)