Flu outbreak fears hammer Mexico's peso, stocks

(Recasts; adds trader comment, dollar auctions)

MEXICO CITY, April 27 (Reuters) - Mexico's peso weakened sharply on Monday and stocks sank due to worries that a swine flu outbreak could further hobble Mexico's battered economy as the government raised the death toll from the sickness.

The peso MXN= MEX01 slumped 4.64 percent to 13.93 per U.S. dollar, extending losses on news that an earthquake had also struck Mexico, although there were no immediate reports of deaths or damage.

The central bank sold $400 million in dollars in three auctions during the session to support the battered currency.

The IPC stock index .MXX tumbled 3.89 percent to 21,704, hurt by steep drops in retailers and airport operators as investors bet the flu would keep people at home and away from stores while also discouraging travel to Mexico.

Mexico's government said the flu outbreak has killed up to 149 people and that the number of cases is likely to rise. Officials ordered schools across the country to close.

"If they start to close businesses and movie theaters, the people don't go out, they don't go to work, and then the economy falls," said Javier Benavides, a currency trader at Base Internacional brokerage in Monterrey.

Mexico's economy is already expected to be dragged into recession by the impact of the downturn in the United States, Mexico's main trading partner.

Stocks tumbled worldwide after seven weeks of gains on Monday as concerns intensified that the spread of swine flu would hit an already recession-stricken global economy.

"Since Mexico seems to be where it all started, there is some medium-term impact, particularly related to tourism," said Beat Siegenthaler, head of emerging markets strategy at TD Securities in London. "But it is too early to say that it could have a major economic impact," Siegenthaler said.

UBS cut its rating on Mexican stocks to 'underweight' from 'overweight,' partly on worries the outbreak will further hurt the economy.

A prolonged epidemic could hit Mexico's $13 billion-a-year tourism industry and weigh on already weak retail sales as Mexicans frightened by the flu stay home and spend less.

U.S. Secretary of State Hillary Clinton on Monday urged caution over travel to Mexico and said the United States took the flu issue "very seriously."

Shares in Mexico's top retailer Wal-Mart de Mexico (WALMEXV.MX) lost 7.91 percent to 36.79 pesos.

Airport operators plunged. GAP (GAPB.MX) (PAC.N) dropped 14.54 percent to 27.57 pesos and OMA (OMAB.MX) lost 11.08 percent to 13.00 pesos, and ASUR (ASURB.MX) (ASR.N) fell 9.13 percent to 43.59 pesos.

In debt trading, the government's benchmark 10-year peso bond MX10YT=RR fell 0.837 of a point in price, pushing its yield up 12 basis points to 7.84 percent. (Reporting by Michael O'Boyle; Editing by James Dalgleish)