UPDATE 3-Mexico central bank steps in to boost troubled peso

(Adds new auction Thursday, quotes)

By Jason Lange

MEXICO CITY, Oct 8 (Reuters) - Mexico's central bank stepped in on Wednesday to halt the peso's worst slide since the Tequila Crisis of the mid-1990s, stopping the currency from collapsing due to the world financial crisis.

Breaking with its long-held aversion to intervening in currency markets, the bank offered to auction $2.5 billion and said it was setting up a daily dollar sales mechanism.

"The peso has become the whipping boy for emerging markets today," said Gray Newman, senior Latin American economist at Morgan Stanley, prior to the central bank intervention.

The credit crunch has thrashed currencies around the world but the peso was particularly hard hit, partly because it is easier to trade than many other emerging market currencies, Newman said. It fell almost 15 percent in a few hours on Wednesday.

The fall was compounded by Mexican companies rushing to buy dollars to cover debt payments in foreign currencies after supermarket firm Comercial Mexicana (COMEUBC.MX) warned it faced problems paying its debt, becoming the first major Mexican company in serious trouble from the credit crunch.

The peso crashed as low as 14.32 to the dollar, its weakest level since the early 1990s.

"The exchange movements today were exaggerated and not sustained by fundamentals," Finance Minister Agustin Carstens said.

The bank announced it would put $2.5 billion in dollars in the market but managed only to sell $998 million in two auctions. It will hold another auction on Thursday morning.

INFLATION

Central Bank Gov. Guillermo Ortiz said the peso's fall would not affect Mexico's inflation badly. Lower currency can often mean higher prices for imports, thus pushing inflation up.

Mexico's central bankers have often cited a bungled intervention that helped trigger the mid-1990s Tequila Crisis economic meltdown as an example of why authorities should keep their hands out of currency markets.

Mexico took years to recover from the crisis. The country ran out of foreign reserves and the peso plunged, sending millions into bankruptcy and poverty.

The central bank also moved to curb wide fluctuations in the exchange rate by announcing a separate dollar sales program that will kick in when the currency falls by more than 2 percent in one day.

Starting Thursday, it will offer to sell $400 million at a minimum 2 percent above the previous day's exchange rate every trading day until further notice.

"Consequently, the (daily $400 million) auction will not result in any foreign exchange sales except when the exchange rate has fallen by more than 2 percent," the bank said. (Additional reporting by Noel Randewich, Michael O'Boyle, Robert Campbell and Alistair Bell; Editing by Diane Craft)