Mexican stocks sink on U.S. credit worries

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MEXICO CITY, Aug 18 (Reuters) - Mexican stocks extended sharp losses on Monday amid new fears that the U.S. government will need to prop up the two largest mortgage finance companies in the United States, Mexico's top trading partner.

The IPC stock index .MXX shed 2.06 percent to to 26,776.

The peso MXN= MEX01 firmed 0.14 percent at the central bank's final 1:30 p.m. (1830 GMT) reference to 10.1690 per dollar as yield-hungry investors were drawn to relatively high interest rates on Mexican debt after the central bank tightened borrowing costs last Friday.

U.S. mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) each plunged after a Barron's report suggested the U.S. Treasury may recapitalize the government-sponsored enterprises.

The Treasury Department responded by saying it had no plans to backstop either of the two companies, which own or guarantee some $5 trillion in outstanding U.S. mortgage debt, about half the market for such debt.

"This revived nervousness and worry about the financial sector in the United States," said a trader in Mexico City.

Bad economic news in the United States is usually bad for Mexico, which sends around 80 percent of its exports to its northern neighbor.

Shares of America Movil (AMXL.MX), Latin America's largest cell phone operator, lost 2.57 percent to 25.42 pesos while its New York-traded shares (AMX.N) fell 2.4 percent to $49.90.

Cemex (CMXCPO.MX), the world's No. 3 cement company, lost 2.88 percent to 21.55 pesos while its shares on Wall Street (CX.N) dropped 2.53 percent to $21.19. (Reporting by Michael O'Boyle; Editing by James Dalgleish)