Mexico peso surges ahead of debt rating decision

* Peso has best week in six months

* Downgrade seen largely priced in

* Stocks close up near 17-month high, Walmex at new high

(Adds closing stock prices)

MEXICO CITY, Nov 13 (Reuters) - Mexico's peso posted its best week in six months on Friday, boosted by bets a possible downgrade of the country's debt is already largely priced into Mexican assets, opening the field for further gains ahead.

The peso MXN=MEX01 surged 1.44 percent on Friday to 13.0125 per U.S. dollar, marking a 3 percent jump this week, its best since early May.

The IPC stock index .MXX added 0.79 percent to 31,002.09, as top local retailer Wal-Mart de Mexico closed at an all-time high, leaving the IPC close at its highest in 17-months following a 3.8 percent gain this week.

Worries Wall Street ratings agencies could downgrade Mexico's debt have weighed on the currency for months, making it miss much of this year's rally in higher yielding assets.

But as the date for a possible decision from agencies nears, the market is deciding a downgrade has been largely priced in, and the currency is enjoying gains similar to other emerging market assets, traders said.

"No one in his right mind was long Mexico," said Francisco Diez, director of emerging market trading at RBC Capital Markets in New York.

"But now the market is less worried about the impact of the downgrade. They will still be investment grade," said Diez.

A downgrade could spur short-term volatility. But the peso could make further gains below 13 per dollar on the back of global recovery hopes and bets the U.S. Federal Reserve will keep interest rates near zero well into 2010.

Traders said much of the peso's jump on Friday was helped by short covering as a global rally in riskier assets pulled the currency past key technical levels.

After watering down proposals to boost Mexico's non-oil tax income, lawmakers are expected to pass the spending side of the 2010 budget this weekend.

Market players think Standard & Poor's and Fitch could still take time to decide on a final verdict.

Many traders and analysts think only one agency will follow through with a one-notch downgrade of Mexico's debt after lawmakers failed to significantly expand the government's tax base to curb its dependence declining oil production.

The yield on the government's benchmark 10-year peso bond MX10YT=RR edged down to 7.86 percent, trading at its lowest in a month.

Helping the peso on Friday, the U.S. trade deficit widened in September by the largest margin in more than 10 years, boding well for U.S. consumer demand.

Mexican exports to the U.S. grew 7.5 percent during the month, pointing to a continued recovery for Mexico's manufacturers, who send most of their products to the northern neighbor.

"The peso is gaining due to the contagion of external markets, flows entering and a better perspective on Mexico," said a trader in Mexico City.

Friday's gains took the peso to the cusp of the 13 per dollar level, which the currency has had trouble breaking since it lost one-quarter of its value against the dollar in the depths of the global credit crisis late last year.

In stock trading, shares in Wal-Mart de Mexico (WALMEXV.MX) hit their best price ever, closing up added 2.81 percent to 51.56 pesos while cement maker Cemex (CMXCPO.MX) rose 1.14 percent to 15.08 pesos.

(Reporting by Michael O'Boyle; Editing by Andrew Hay)