EMERGING MARKETS-LatAm stocks slide as Lula's win triggers Brazil selloff

By Ragini Mathur

Oct 26 (Reuters) - Brazilian assets tumbled on Monday, leading losses in Latin American markets, after President Luiz Inácio Lula da Silva's election to a fourth term wiped out gains built on 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 8.6% against the dollar in its biggest one-day drop since 1999. The stock exchange was halted for 30 minutes after a 10% drop in the Bovespa .BVSP index from its last close tripped the market's circuit breaker.

The index was down nearly 14.5% after trading resumed, also on track to mark its steepest one-day fall since 1998.

The selloff also hit Brazil's sovereign debt. Longer-dated bonds fell hardest, with the 2056 maturity down about 2.5 cents.

The rout spread across the region. The MSCI index tracking regional equities .MILA00000PUS fell 8.4% and was set for its biggest single-day fall since March 2020.

Investors had been positioned for the opposite result.

Markets had moved sharply toward a rightward turn since Bolsonaro's unexpected first-round win three weeks ago. The Bovespa closed last week 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 0.3% higher even as stocks .MXX were muted.

Colombian stocks .COLCAP fell 2.2% and the peso fell 1.2%.

The MSCI currency index .MILA00000CUS gained 1.1%.

In Chile, the peso gained 0.5% while stocks .MMXIPSAGC slipped 1.5%, ahead of a central bank policy meeting on Monday with a decision due Tuesday.

Peru's sol gained 0.3% as gold, a key export, rebounded from the previous session's three-month low. Retreating oil prices also eased inflation worries ahead of this week's US Federal Reserve meeting. Peruvian stocks .MIPE00000PUS were flat. GOL/

Key Latin American stock indexes and currencies: