By Walter Brandimarte and Alexandra Alper
RIO DE JANEIRO/MEXICO CITY, Dec 18 (Reuters) - Latin American financial markets gained on Wednesday after the Federal Reserve suggested U.S. interest rates will stay low for longer than expected, soothing investors who were surprised by the bank's decision to start winding down its stimulus program.
Stocks and currencies in the region initially slid in a knee-jerk reaction to the Fed's announcement that it will cut its $85 billion-a-month bond-buying program by an initial $10 billion.
The move, which generally was not expected until next year, could reduce the supply of dollars that tend to flow into emerging market economies seeking higher returns.
But markets soon bounced back as investors focused on the Fed's suggestion that it may keep overnight rates near zero "well past the time" that the jobless rate falls below 6.5 percent.
The stimulus tapering "was already widely discounted," Mexican Finance Minister Luis Videgaray told local radio.
"What was newsworthy and what gave optimism to markets is that the short-term rates are going to be maintained at levels near zero, even if unemployment in the United States keeps decreasing."
The Mexican peso gained 0.62 percent to close at 12.8785 per dollar, reversing losses of 0.7 percent recorded right after the Fed's announcement.
Mexico's IPC stock index pared earlier gains to close up 0.77 percent at 42,079.87.
Analysts said Mexico should benefit from improving economic conditions in its northern neighbor more than other Latin American economies.
"For Mexico, this should be a positive development as an improvement in the U.S. market will likely result in an improvement in Mexico's economic conditions," said Gabriel Lozano, JP Morgan economist for Mexico.
Mexico's banking regulator Jaime Gonzalez admitted that interest rates are likely to rise in Mexico as the Fed begins to withdraw its stimulus, but added that domestic economic strength would help cushion the blow.
"Markets continue to recognize the fundamentals of the Mexican economy and that we don't depend exclusively on that additional liquidity that is in the economy."
While Mexico's growth is expected to notch a paltry 1.3 percent this year, well below the 3.8 percent recorded in 2012, a host of reforms spearheaded by President Enrique Pena Nieto - including a long-awaited opening of the energy sector to private investment - are expected to boost growth going forward.
Most Brazilian markets were already closed when the Fed's decision was released, but futures contracts for stocks and the currency, which were still trading on the BM&FBovespa exchange, also posted gains after an initial slide.
The real closed 0.81 percent weaker at 2.34 per dollar prior to the Fed's decision. Brazil's benchmark Bovespa index future contracts for February rallied 2.1 percent.
On Wednesday, Brazil's Finance Minister Guido Mantega welcomed the U.S. central bank's announcement.
"It was a good decision because it signaled a gradual reduction of the Fed's monetary stimulus," he told local television.
The decision not to commit to additional reductions of $10 billion in the coming months "means less turbulence in currency markets" and will keep the real from weakening as much as some had expected, he said.
Brazil's real has weakened over 10 percent so far this year, more than most Latin American currencies, as investors worry about a deterioration in the country's economic fundamentals that could result in a sovereign debt downgrade by at least one ratings firm next year.