EMERGING MARKETS-Latam stocks rise as smaller markets lead 2010

* Peru, Chile, Argentina lead gains in the region

* Brazil market making gains in 2011 on economic growth

By Elzio Barreto

SAO PAULO, Dec 30 (Reuters) - Latin American stocks rose sharply on Thursday, capping a year in which smaller markets in Peru, Chile and Argentina outperformed the top economies of Brazil and Mexico.

The MSCI Latin American stocks index .MILA00000PUS gained 1.26 percent, up for a third straight session, adding to gains that pushed the index up about 11.6 percent in 2010.

Among the best performers in the region, Argentina's benchmark Merval index .MERV jumped nearly 52 percent in 2010 to a record high.

Landmark debt swaps of Argentina's debt from its $100-billion default in 2002 buoyed confidence in the country, driving up bank shares. Banco Hipotecario (BHI.BA) closed up 4.56 percent on Thursday, marking a nearly 120 percent gain for the year.

Chile's IPSA .IPSA gained about 37 percent in 2010, and the general index in Peru's stock exchange .IGRA surged 64 percent, benefiting from rising prices of copper, gold and silver.

"The smaller markets in Peru and Chile did well because their economies went from strength to strength, with mining activity growing and the increase in prices of metals like gold and copper," said Roberto Lampl, head of Latin America equities at Baring Asset Management in London, which oversees $12 billion in emerging market stocks.

"We're pretty positive for the prospects for 2011, with a global recovery occurring," he added. "We really like the materials story in Latin America. We like mining a lot, more than other commodity sectors."

The IPSA rose 0.81 percent on Thursday, and the general index in Peru edged 0.32 percent higher, while the Merval was flat.

Brazil's Bovespa index .BVSP rose 0.51 percent on Thursday, with gains for the year at a paltry 1.1 percent.

Mining giant Vale (VALE5.SA) slipped 0.2 percent on Thursday, reversing earlier gains driven by expectations the company will raise iron ore prices by 8.8 percent in January, according to Reuters calculations. [ID:nTOE6BT05G]

Vale shares rose nearly 17 percent in 2010, buoyed by Chinese demand for metals. But Vale was outpaced by shares of consumer-oriented companies as record-low unemployment in Brazil and rising wages fueled demand for consumer goods in Latin America's largest economy.

Tobacco company Souza Cruz (CRUZ3.SA), beer maker AmBev (AMBV4.SA), clothing retailer Lojas Renner (LREN3.SA) and Natura (NATU3.SA) surged between 34 percent and 63 percent in 2010.

At the other end, oil company Petrobras (PETR4.SA) plunged nearly 25 percent in 2010, weighed by concerns over dilution from its massive $70 billion stock offering. Petrobras shares climbed 1.19 percent on Thursday.

Steelmakers also took a beating this year, with Gerdau (GGBR4.SA) down nearly 23 percent and Usiminas (USIM5.SA) falling around 25 percent on concerns of overcapacity that pressured steel prices.

"Brazil is going to continue to do well, with the economy growing next year and that should be good for some companies," said Roni Lacerda, who helps manage 2.8 billion reais of stocks at Mercatto Investimentos in Rio de Janeiro. "You have to be very selective, as some sectors are overpriced."

Lacerda said companies in the petrochemical, real estate and construction and consumer sectors will likely do well in 2011, with steelmakers facing an uphill battle again.

Mexico's IPC index .MXX traded flat as top retailer Wal-Mart de Mexico (WALMEXV.MX) rose 0.86 while bank Banorte (GFNORTEO.MX) shed 2.19 percent.

The index gained 19 percent so far in 2010, led by a more than 90 percent surge in Grupo Carso (GCARSOA1.MX), the conglomerate controlled by billionaire Carlos Slim as it prepares to spin off its mining and real estate units. (Additional reporting by Michael O'Boyle in Mexico City; Editing by Leslie Adler)