Mexico peso firms on tax bill hopes; stocks sink

* Peso firms on hopes PRI senators will back tax bill

* Stocks slump by most in over four months on US data (Recasts throughout; adds closing stock prices)

MEXICO CITY, Oct 27 (Reuters) - Mexico's peso firmed sharply on Tuesday amid hopes that the main opposition party will back tax reforms currently being debated in the Senate to curb the country's dependence on declining oil output.

But local stocks sank by their most in more than four months after a drop in U.S. consumer confidence in October cast doubt on the strength of an economic recovery in the United States, Mexico's top trading partner.

The peso MXN= MEX01 gained 0.66 percent to 13.215 per U.S. dollar.

The currency oscillated between bets senators will back a tax reform bill largely in line with what lower house lawmakers approved last week and concerns that senators could gut the bill and increase the chance of a sovereign debt downgrade.

"A lot of people think this could still turn out fine, that there will be a tax reform, and, like in the movies, it will all be worked out in the final minutes," said a currency trader in Monterrey. "But I don't believe in happy endings," he added.

Analysts expect uncertainty on the talks to weigh further on the peso. [ID:nN27373269]

Sen. Manlio Beltrones, who leads the centrist Institutional Revolutionary Party, or PRI, in the Senate, left open the possibility his party could approve a hike of Mexico's value-added tax. [ID:nN27265079]

Earlier, a party representative said that powerful forces within the PRI were pushing for a rejection of the VAT hike. Beltrones also said the PRI did not plan to revise upward estimated oil export revenues or the deficit in the country's 2010 federal budget.

Wall Street ratings agencies Standard & Poor's and Fitch Ratings have threatened to downgrade Mexico's debt rating if the country does not reduce its dependence on oil revenue, which accounts for more than a third of the federal budget.

Mexico's peso has lost 2.5 percent since senators suggested late last week they could reject the tax hikes approved by the lower house.

The government's benchmark 10-year peso bond MX10YT-RR fell under one basis point to yield 8.15 percent.

The IPC stock index .MXX closed down 3.19 percent to 29,312.84 points, also weighed down by a slump in index heavyweight America Movil (AMXL.MX). Latin America's top cellphone provider slid 4.17 percent to 29.41 pesos.

America Movil posted a 51 percent rise in third-quarter net profit on Monday, in line with expectations. [ID:nN26208722]

The drop in U.S. consumer confidence bode poorly for a quick recovery in Mexico's battered export sector.

"U.S. consumers are not deciding to buy more this obviously could slow down the recovery for the United States and Mexico," said Carlos Gonzales, an analyst at Ixe brokerage firm in Mexico City.

Shares in cement maker Cemex (CMXCPO.MX) lost 5.46 percent to 14.90 pesos ahead of its third-quarter earnings, due after the market close. It was expected to report a 9 percent drop in net profit. [ID:nN26209813]