*Emerging markets undermined by weak U.S. data

*U.S. Treasury sell-off drags emerging debt lower

*MSCI emerging market stocks fall 2 percent .MSCIEF

By Daniel Bases

NEW YORK, May 21 (Reuters) - Emerging market assets fell in
tandem with the sharp losses in developed markets after U.S.
data showed further signs of economic stress and commodity
prices, a major underpinning for the sector, weakened.

A record number of people remaining on the U.S. jobless
rolls and a decline in manufacturing from a key U.S. region
undermined equities and the U.S. dollar. [ID:nN21256165]

The prospect of a cut to Britain's coveted AAA credit
rating by Standard & Poor's unnerved investors in U.S.
Treasuries on the idea that America may face a similar fate,
which contributed to losses in emerging market sovereign debt.
[ID:nLL627240] [ID:nN21294698],

One fund manager said the damage to emerging market debt
was limited.

"Emerging debt prices are weak because of (U.S.)
Treasuries. There has been some selling but not a lot," said
Jeff Grills, co-head of JP Morgan Asset Management's emerging
debt fund in New York.

"In the next week, we're probably going to be OK. We're
clearly vulnerable to what is going on in the external markets.
So if stocks trade down significantly I don't think we are
immune. But as a stand alone there is really nothing causing
anyone to be too concerned," Grills said.

Yield spreads on the JP Morgan Emerging Markets Bond Index
Plus 11EMJ.JPMEMBIPLUS narrowed by 4 basis points to 471
basis points over weaker U.S. Treasuries. The benchmark 10-year
U.S. Treasury fell 1-1/2 points in price, boosting the yield by
17 basis points to 3.37 percent US10YT=RR.

The biggest damage however could be found in emerging
equities where the broad MSCI index dropped 2.0 percent
.MSCIEF while the MSCI Latin American stock index fell 3.08
percent .MILA00000PUS after losses of more than 2 percent on
the main stock indexes in Brazil and Mexico.

Commodity prices didn't help emerging markets either.
Prices for oil, industrial metals and grains were mostly lower.
Spot gold prices however gained, rising 1.77 percent or $16.55
to $953.65 an ounce XAU=.

Mexico's economy is closely tied to the United States and
is seen as the must vulnerable to a protracted economic slump
in its northern neighbor.

The peso extended a slide from a six-month high on
Wednesday, losing 1.04 percent to 13.07 per U.S. dollar at the
central bank's final 1:30 p.m. (1830 GMT) reference. The peso
then extended losses to 13.12 in late afternoon trade.

HSBC noted that speculation is mounting that Mexico's debt
could soon be downgraded. Last week, Standard & Poor's signaled
it could cut Mexico's rating later in 2009. Fitch Ratings put
Mexico on a negative watch last November.

In Brazil yields on Brazilian interest rate futures
<0#DIJ:> jumped and the country's currency tumbled after
Central Bank President Henrique Meirelles warned of "excessive
euphoria" that is leading some financial markets higher.

The real fell for the first day in four, shedding shed 0.4
percent to 2.038 reais per dollar, paring this year's gains to
14.5 percent (BRBY: Quote, Profile, Research). [ID:nN21310411]
(Additional reporting by Michael O'Boyle in Mexico City, and
Guillermo Parra-Bernal in Sao Paulo; Editing by Diane Craft)