Mexico peso knocked from 1-year high by Dubai jitters

(Recasts, adds comments, debt and stock movements)

MEXICO CITY Nov 26 (Reuters) - Mexico's peso sank Thursday and stocks tumbled as news of debt problems in Dubai that could hit still weak global banks pushed investors to sell off riskier assets around the world.

The peso MXN= MEX01 lost 0.85 percent to 12.934 per U.S. dollar, breaking a three-day winning streak that took the Mexican currency to its strongest close in a year.

The IPC stock index .MXX fell 1.49 percent to 30,898.

Dubai said Wednesday it was asking creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.

Banking stocks came under pressure because of potential exposure to any bad debt in the region.

"Stock markets are registering substantial drops due to the uncertainty about the losses that banks could have if more debt from the emirate is not honored," wrote Salvador Moreno, an economist at ING in Mexico City, in a note to clients.

The yield on the government's benchmark 10-year peso bond MX10YT=RR bid up 5 basis points to 7.87 percent.

Traders said volume was thin due to the lack of participation from the United States, where markets were closed for the Thanksgiving holiday.

Many of the same banks that have been bullish on the peso's prospects were taking profits, traders said, after the currency closed at its strongest level since November 2008 on Wednesday.

Before Thursday's losses, the peso had gained 2 percent this week after Fitch Ratings delivered a widely-expected downgrade of Mexico's debt, but revised the country's credit outlook to stable, quelling concerns of a further downgrade.

Some analysts think further gains for the currency could be limited as Standard & Poor's also has Mexico on a negative watch and could issue a downgrade as well.

"We are going to have to wait for S&P before the currency can gain much more," said a trader in Monterrey.

The looming threat of a downgrade has dogged the peso this year, making it lag behind the global rally in emerging market assets. But with downgrades largely priced in, many analysts think the peso could make further gains.

"The peso rally is just beginning," wrote Luis Flores, an economist at Ixe brokerage in Mexico City, in a report to clients, who sees the peso soon hitting 12.70 and strengthening further to 12.50 by early next year.

In stock trading, shares of copper miner Grupo Mexico (GMEXICOB.MX) lost 3.39 percent to 30.50 pesos while America Movil (AMXL.MX), Latin America's biggest cell phone operator shed 1.4 percent to 31.06 pesos. (Reporting by Michael O'Boyle; Editing by John Picinich) ((michael.oboyle@thomsonreuters.com; +5255-5282-7153; Reuters Messaging: michael.oboyle.reuters.com@reuters.net))