By Alexia Vlahos

SANTIAGO, June 17 (Reuters) - Chile's peso closed at a near 9-month high on Wednesday as investors held back from renewing dollar forward positions following the government's decision to repatriate and convert $4 billion in savings into pesos, while stocks fell sharply, traders said.

The peso CLP=CL closed 1.61 percent firmer at 546.00/546.50 per dollar compared to Tuesday's close at 554.80/555.30.

The peso is now up 17.4 percent against the dollar year-to-date after slumping 22.3 percent in 2008.

The government announced on Monday it would cash in $4 billion in windfall copper savings to counter a ballooning fiscal deficit. The central bank will sell the dollars for pesos on behalf of the government starting in July.

"The government's announcement to extend the dollar sales has created a new scenario for the exchange rate," said one foreign exchange dealer. "For now, the peso should firm against the dollar."

The blue-chip IPSA index .IPSA was 2.1 percent weaker at 3,127 points, as investors continued to take profits after recent sharp gains, while the all-market IGPA index .IGPA fell 1.69 percent to 14,957 points.

"It's a combination of profit-taking and certain correction in the market," said Diego Celedon, deputy director of research at brokerage Banchile, citing sharp gains in recent months.

The IPSA, which is now up around 31 percent year-to-date, rose around 16 percent in May, when it posted its biggest gain in a single month since January 1994.