EMERGING MARKETS-LatAm stocks slide as Lula's win sparks frenzied selloff in Brazil

By Ragini Mathur and Niket Nishant

Oct 26 (Reuters) - Latin American stocks fell to their lowest in more than two months on Monday, dragged by Brazilian equities after President Luiz Inácio Lula da Silva was elected to a fourth term, erasing gains that followed his rival's strong first-round showing.

Lula's more market-friendly rival Flávio Bolsonaro lost in the runoff by over 4 million votes. Bolsonaro said he does not recognize the result and will ask for it to be annulled.

Brazil's real fell 8.5% against the dollar in its biggest one-day drop since 2002. The stock exchange was halted for 30 minutes after a 10% drop in the Bovespa .BVSP index tripped the market's circuit breaker.

The index was last down 14.4%, on track to mark its steepest one-day fall since 2020. The selloff also hit Brazil's sovereign debt, particularly the longer-dated bonds, with the 2056 maturity down about 2.5 cents.

"Lula's biggest challenge will be to convince markets that he can deliver a credible, sustainable fiscal adjustment while prioritizing real-wage growth and employment," said Mauricio Monge, senior Latin America economist at Oxford Economics.

The rout spread across the region. The MSCI index tracking regional equities .MILA00000PUS fell 11.5%.

Investors had expected a victory for Lula's rival Bolsonaro, whose surprise first-round win three weeks ago sent assets higher. Last week, the Bovespa closed nearly 7% above its pre-vote level, and the real had strengthened almost 5%.

"The reaction is one of markets taking down fairly long positions that have been building over the past couple of months, and there's not going to be a honeymoon from a market perspective soon," said Alejandro Cuadrado, managing director and global head of FX and LatAm strategy at BBVA.

Lula returns to office facing a more conservative Congress, rising debt and stubborn inflation. Gross public debt is above 82% of GDP, and interest costs are near 8.7% of GDP.

Until the government gives a credible signal on fiscal policy, markets may see little reason to rush back into Brazil.

"Getting it so ugly now makes some of the other contestants kind of prettier by default," Cuadrado said. He expects some investors to rotate into Mexico, where the peso edged 0.5% higher even as stocks .MXX were muted.

Colombian stocks .COLCAP fell 1.9% and the peso was flat. The MSCI currency index .MILA00000CUS lost about 4%.

In Chile, the peso gained 0.6% while stocks .MMXIPSAGC slipped 1.6% ahead of a central bank policy meeting on Monday, with a decision due Tuesday.

Peru's sol gained 0.1% as gold, a key export, rebounded from the previous session's three-month low. GOL/

Key Latin American stock indexes and currencies: