Mexico peso, stocks rally on global bank bailouts

(Recasts; adds quote, closing prices)

By Michael O'Boyle and Noel Randewich

MEXICO CITY, Oct 13 (Reuters) - Mexico's peso soared on Monday, rebounding from its worst week since the mid-1990's "Tequila Crisis," and stocks saw their biggest jump in a decade as global efforts to back struggling banks spurred a worldwide rally.

The peso MEX01 MXN=, which was battered for the prior eight sessions, traded 5.79 percent stronger at 12.402 per dollar at the central bank's final 1:30 p.m. local time (1830 GMT) reference.

The IPC stock index .MXX closed 11.01 percent higher at 22,095.89 points, its biggest one-day percentage gain since Sept. 15, 1998, after losing more than 10 percent last week alone.

"The value investors dipped their feet back in today," said Manuel Lasa, head of equities trading at Interacciones brokerage in Mexico City. "But as long as we see volatility like this, the crisis is not over."

Governments from Europe to Australia pledged to pump hundreds of billions of dollars into the banking system in a bid to stave off the world's worst financial crisis in nearly 80 years, which threatens to push major economies into recession.

The optimism spurred a sharp recovery in the peso, which was hammered last week as global investors dumped emerging market assets and demand soared for dollars from local companies who feared Mexico's currency could devalue further.

"Last week, panic prevailed. In the measure that investors recuperate their confidence in the fundamentals, the peso should shine stronger," said Tonatiuh Rodriguez, who manages 54 billion pesos ($4.35 billion) at pension fund Afore XXI in Mexico City.

Still, Rodriguez said growth in Mexico would be harder hit by the economic slowdown in the United States than was believed before the sharp sell-offs seen in recent weeks. He said the currency would likely recuperate to trade between 11 pesos and 12 pesos per dollar.

"It is evident that we are entering a downturn in the cycle, without doubt, now we are waiting to know the depth and duration," Rodriguez said.

The Banco de Mexico stepped into the fray last week to sell more than one-tenth of its international reserves to prop up the currency, marking the first time it has intervened in the foreign exchange market since the 1998 Russian financial crisis.

The peso still weakened nearly 15 percent last week despite the bank's sale of $8.9 billion. Even with Monday's gains, the currency is still down 19 percent from its August high.

The central bank continued to hold auctions in the local market on Monday, but there was no demand for the bank's dollars due to the sharp appreciation of the currency.

PESO BONDS SURGE

Demand for Mexico's peso bonds strengthened, and the yield on the government's benchmark 10-year peso bond MX10YT=RR eased 18 basis points to trade at 8.79 percent.