EMERGING MARKETS-Stocks up 2.5 pct; lat hits 4-mth high

* Emerging stocks rally 2.5 pct, spreads narrow

* Latvian lat strengthens to fresh 4-month high vs euro

* Hungarian forint at highest in nearly 3 weeks

By Carolyn Cohn

LONDON, June 10 (Reuters) - Emerging assets rallied on Wednesday, boosted by positive news on U.S. banks and higher oil, and the lat hit a fresh 4-month high against the euro on growing expectations Latvia will stave off devaluation.

News that the U.S. Treasury approved plans by 10 banks to repay $68 billion in TARP funds alongside crude oil prices above $71 a barrel helped equity markets and risk appetite.

Also, two Chinese newspapers reported that factory output in China rose in May at the fastest pace since September.

"Globally, other than in Japan, most of the data has been relatively good and we are seeing pricing-in of an across the board recovery," said Juliet Sampson, head of emerging FX strategy at HSBC.

Benchmark emerging equities .MSCIEF rose 2.53 percent and emerging sovereign debt spreads tightened by 5 basis points to 408 bps over U.S. Treasuries 11EMJ.

Spreads were last below the 400 bps level at the end of September. They rose as high as 900 bps at the height of the financial crisis last October.

The lat rose as Latvian Prime Minister Valdis Dombrovskis meets European Commission President Jose Manuel Barroso on Wednesday to discuss planned budget cuts that could unlock the next tranche of the previously-agreed $7.5 billion aid package from the International Monetary Fund and the European Union.

Speculation Latvia may fail to get this cash and be forced into a currency devaluation hit Latvian markets last week and caused regional contagion.

But Latvia's pledge of stringent budget cuts have added some stability. The lat firmed to 0.6985 against the euro EURLVL=, moving towards the upper end of its 1 percent trading band.

"This is the Latvia relief rally continuing and the main reason is that they seem not to be on the verge of devaluing right now," said Sampson. "We have seen regional currencies come all the way back from pre-Latvia scare levels and there seems to be reasonable momentum."

Latvian five-year credit default swaps, used to insure against default of debt, are being quoted at 725 basis point, about 20 bps less than at the start of the week, CDS monitor CMA DataVision said.

However, Fitch analyst Ed Parker told a conference a "significant and rising risk" of devaluation remains in Latvia.

FORINT OUTPERFORMS

The Hungarian forint rose 0.9 percent to hit its highest against the euro EURHUF= in nearly three weeks, supported by the improved mood towards Latvia.

The forint sold off last week as a proxy for the pegged lat, as Hungary, like Latvia, has large exposure to foreign currency loans. Scandinavian banks have lent heavily in the Baltics.

"If you can't put on a Latvia position you go for things like Scandinavia or Hungary," said one trader.

Other emerging European currencies also edged up. The Polish zloty EURPLN= and Romanian leu EURRON= hit one-week highs against the euro.

In Ukraine, prime minister Yulia Tymoshenko said the government would take controlling stakes and inject a total of $1.26 billion into three banks. [ID:nLA204970]

Ukraine, like Latvia, is seen as one of the more vulnerable economies in the region.

However, the prospect of International Monetary Fund aid is helping. The IMF said on Wednesday the fourth tranche of its standby loan programme for Ukraine would amount to $3.8 billion, up from an originally planned $2.94 billion.

Ukrainian debt spreads on JPMorgan's EMBI+ index tightened 29 bps from the U.S. close.

(Additional reporting by Sujata Rao; Editing by Andy Bruce)