WRAPUP 1-US recession fears loom over Mexico

* Finance minister says economic impact to be limited

* IMF says slowing U.S. economy could drag down Mexico

* Demand for country's bonds may limit peso losses

* Recession fears raise prospect of Mexico rate cut

By Michael O'Boyle

MEXICO CITY, Aug 8 (Reuters) - Mexico tried to reassure investors that a global markets rout would not spark an economic crisis even as recession fears in the United States, its key trading partner, pounded Mexico's currency and stocks.

Mexico's peso sank to a seven-month low on Monday and stocks tumbled almost 6 percent in the first day of trading after Standard & Poor's stripped the United States of its top-tier credit rating.

Finance Minister Ernesto Cordero said on Monday that Mexico is well prepared to face the volatility slamming financial markets, pointing to record international reserves and solid demand for Mexican bonds.

"Capital markets can obviously suffer negative fluctuations, our exchange rate will be volatile for a while, but I'd say it won't come to more than that," Cordero told a local radio station. [ID:nN1E77707W]

Mexico is Latin America's second biggest economy. After lagging way behind other Latin American economies, it has in recent months seen a combination of solid growth and low inflation, but it is dependent on the United States, which buys around 80 percent of its exports.

The International Monetary Fund said in a report issued on Monday that a more protracted slowdown in U.S. growth would be "a material drag" to Mexico's economy. [ID:nN1E7770KR]

Cordero had earlier this year predicted Mexico's economy may grow 5.5 percent in 2011 but has since scaled back the projection. He said on Monday that the government is sticking to its outlook for expansion of around 4.3 percent this year [ID:nN1E7741R4] and that he expects similar growth in 2012. [ID:nN1E7771JQ]

The peso MXN= sank to around 12.28 per dollar on Monday, although analysts and investors said further losses could be limited as investors continue to buy into the country's bonds.

The debt crises in the United States and Europe have given Mexican debt the allure of a safe haven as Mexico's public finances are in comparatively better shape, analysts said.

"The joke is that Mexico is now like Switzerland," said Alonso Madero, a fund manager at financial group Actinver in Mexico City. "Now, global investors are taking refuge here."

Still, a new recession in the United States could wreck Mexico's hopes of fast growth as U.S. businesses and households cut back on spending.

"It is clear that we are heading toward a recession in the United States, and the downgrade from Standard and Poor's only makes things worse," said Madero.

A U.S. recession would undermine Mexican exports of everything from cars and refrigerators to electronics and could force Mexican policy makers to relax monetary policy.

"If we get confirmation that there could be a recession, or a sharp deceleration in America, they would cut interest rates in Mexico and we should expect the peso to depreciate more," said Rodolfo Navarrete, head of analysis at brokerage Vector in Mexico City.

Mexico is the only major Latin American economy to have not tightened borrowing costs in the last year.

Yields on interest rate swaps suggested that, for now, most investors still expect the central bank to raise interest rates some time in the second half of next year. BOMWATCH2 (Reporting by Michael O'Boyle; Editing by Kieran Murray and Diane Craft)