EMERGING MARKETS-Mexican peso hits 2010 low against Brazil real

* Investors prepare for key U.S. data this week

* Brazil's real firms 0.2 pct, Mexican peso loses 0.3 pct

* Yields on Brazil rates drop after local industrial data

By Samantha Pearson and Caroline Stauffer

SAO PAULO/MEXICO CITY Aug 31 (Reuters) - The Mexican peso sunk to its weakest level this year against the Brazilian real on Tuesday as concerns deepened about the economic recovery of the United States, Mexico's top trading partner.

At home, gruesome killings and the murder of local politicians in the country's escalating war on drug cartels has also started to worry investors abroad.

Meanwhile, Brazil's real has been boosted by optimism over fund-raising plans by local companies, which should lure even more foreign money into Latin America's biggest economy.

The Mexican peso lost 0.5 percent against the Brazilian real BRLMXN=R to 7.511, paring losses very slightly after hitting its weakest intraday level against the real since December 31, 2009.

"The domestic news of increased violence is clearly having an effect on asset prices and the peso, but more so the currency remains vulnerable to the U.S. economic outlook," said Clyde Wardle, an emerging markets analyst at HSBC, in a note to clients.

Investors' pessimism about the recovery of the United States, which buys about 80 percent of Mexico's exports, deepened after data showed business activity in the U.S. Midwest fell more than expected in August. [ID:nN31183001] They were also cautious ahead of the country's key monthly employment report later this week.

"It's a big week in terms of relevant information from the United States -- U.S. labor and manufacturing are very important to Mexico's economy," said Daniela Blancas, a strategist at Scotia Capital in Mexico City.

Against the U.S dollar, the Mexican currency MXN= weakened 0.33 percent to 13.203 per dollar, while the Brazilian real BRBY was bid 0.17 percent stronger at 1.755 reais per dollar on the local spot market.

Jitters over the U.S. recovery also pushed down the price of copper, Chile's main export.

The Chilean peso CLP= weakened 0.28 percent to 501.90 per dollar, edging further away from the seven-month high it hit on Monday.

BRAZIL'S CURRENCY SHRUGS OFF LOCAL DATA

Meanwhile, Brazil's currency has benefited from the country's greater reliance on trade with China, rather than the United States, and local corporate deals.

"Brazil has continued to look solid through the current bout of market weakness," said analysts at RBS in a note. "For the real, the flow story continues to hold, with Petrobras (Brazil's state-run oil company) potentially making a second market offering in the third quarter, along with several other initial public offerings all of which should attract considerable foreign interest."

The currency firmed on Tuesday despite weak national industrial data which pushed yields down on Brazilian interest rate futures contracts.

Industrial production in Brazil rose 0.4 percent in July from June, far lower than the 0.8 percent median forecast in a Reuters survey. [ID:nSAQ002469]

The data prompted investors to bet that the central bank would be under less pressure in the months ahead to raise interest rates in an effort to contain inflation.

Economists already generally agree that the central bank will keep rates on hold at 10.75 percent at the conclusion of its next meeting on Wednesday.

The yield on the contract due January 2012 DIJF2, one of the most popular contracts of the morning session, fell to 11.32 percent from 11.41 percent.

(Editing by Chizu Nomiyama)