CORRECTED - Mexico peso hit by dollar's rally; stocks jump

(Corrects expert's title and location in 7th paragraph)

MEXICO CITY, Aug 8 (Reuters) - Mexico's peso weakened sharply on Friday as the dollar rallied on growing fears the rest of the world will be affected by the economic slowdown hitting the U.S., while stocks followed Wall Street higher on falling oil prices.

The peso <MXN=> MEX01 weakened 1.43 percent to 10.1321 per dollar, its biggest one-day drop in two years.

The IPC stock index .MXX was up 0.89 percent to 27,226 points, after briefly jumping 1 percent.

Most major currencies fell 1 percent or more against the greenback, following news of economic weakness in Europe and Japan.

A weak U.S. economy has already been priced into the value of the dollar, but other countries likely to be hit by the slowdown have not yet seen their currencies suffer, experts said.

Mexican growth has begun to show signs of slowing, following the downturn in the economy of the United States, Mexico's chief trading partner.

"Mexico is certainly going to feel the impact of the U.S. slowdown and to a certain extent growth expectations (in Mexico) have been overly optimistic," said Nick Chamie, head of emerging markets research at RBC in Toronto.

In debt trading, the government's 10-year peso bond <MX10YT=RR> fell 0.181 of a point in price to 93.451, pushing its yield up 3 basis points to 8.78 percent.