May 23, 2012 / 5:17 PM / 7 years ago

EMERGING MARKETS-Latam stocks plunge on Europe worry

* Euro zone officials say Greek exit contingencies needed

* Merkel dashes hopes of measures from EU summit

* Brazil Bovespa falls 3.19 pct, Mexico IPC down 1.31 pct

By Asher Levine and Danielle Assalve

SAO PAULO, May 23 (Reuters) - Latin American stocks posted their biggest one-day drop in nearly seven months o n W ednesday as investors sold off riskier assets on mounting fears over Greece’s possible exit from the euro zone.

The MSCI Latin American stock index fell for a second day, sliding 3.82 percent to 3,281.98, its lowest level in nearly eight months. A technical indicator known as the relative strength index showed stocks at “oversold” levels for a 12th straight day, the longest streak in nearly 10 years.

Risk aversion mounted after Reuters reported on Wednesday that euro zone officials agreed that each country in the currency bloc will have to prepare a contingency plan for the possibility of Greece leaving the euro.

Nervous investors looked to a summit of European Union leaders scheduled later in the day for measures to resolve the crisis. But German Chancellor Angela Merkel dashed those hopes when she said no decisions were expected from the meeting, sending stocks lower still.

“The expectations created around the meeting of European leaders have been dampened, with investors believing that some kind of measure will only be taken down the road,” said William Alves, an analyst with XP Investimentos in Sao Paulo.

Brazil’s benchmark Bovespa stock index continued Tuesday’s slide, falling 3.19 percent to 53,280.15.

State-controlled lender Banco do Brasil fell 6.12 percent, contributing most to the index’s decline, while preferred shares of oil giant Petrobras dropped 3.5 percent.

Brazilian stocks have fallen nearly 14 percent in May alone as risk-averse investors concerned over the euro zone debt crisis sold off shares in favor of traditional safe-haven assets such as the U.S. dollar. Should this trend continue, the Bovespa will close May with its worst monthly loss since the depths of the global financial crisis in October 2008.

“In this scenario, the external variables are interfering much more in trading than the fundamentals of the companies themselves,” said Aloisio Villeth Lemos, an analyst with Agora Corretora in Rio de Janeiro.

The Bovespa is down more than 6 percent this year after rising almost 14 percent in the first quarter on the back of abundant liquidity from foreign investors and attractive share prices following 2011’s 18 percent decline.

Still, some analysts say recent losses do not necessarily signal a drastic change in the outlook for Brazilian stocks.

“It’s still a bit premature to say investors have soured on Brazil,” said Silvio Campos, an economist with Tendencias Consultoria in Sao Paulo.

“It’s clear that investors are starting to have a less favorable outlook on Brazil, but that is nothing new,” Campos said, citing mounting concerns over slowing economic growth and heavy government intervention in the economy.

Mexico’s IPC index fell for the eighth session in nine, slipping 1.31 percent to 36,989.79.

America Movil, the telecommunications firm controlled by billionaire Carlos Slim, lost 1.2 percent, driving losses in the index, while cement manufacturer Cemex dropped 3.9 percent.

Chile’s IPSA index notched its biggest loss since November, sliding 1.69 percent to 4,165.24 and erasing the index’s gains for the year.

Retailer Falabella dropped 2.3 percent, while industrial conglomerate Copec fell 2.2 percent. (Reporting by Asher Levine; Editing by Todd Benson and Dan Grebler)

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