Mexico burns a 10th of its reserves defending peso

(Adds comment from finance minister, closing prices)

By Robert Campbell and Michael O'Boyle

MEXICO CITY, Oct 10 (Reuters) - Mexico made its most aggressive attempt yet to save the peso on Friday, selling $6.4 billion to prop up the currency, which suffered its worst weekly decline since the 1995 Tequila Crisis.

Global markets were rocked again on Friday by waves of panicked selling amid fears that the spiraling credit crunch could trigger a deep downturn in the global economy.

Faced with a massive sell-off of emerging market assets and demand for dollars in Mexico from local companies fearing currency losses, the country's central bank has auctioned more than one-tenth of its international reserves this week, raising questions over how long it can keep up the fight.

Finance Minister Agustin Carstens said volatility in the currency market had been "neutralized" by the auctions.

But despite the bank's rare intervention the peso MXN= MEX01 still weakened 4.39 percent at the central bank's 1:30 p.m. (1830 GMT) reference point to 13.12 per dollar.

Government bonds saw their steepest price declines in more than two years while stocks pulled back from a 5 percent drop to close down 1.99 percent at a more than two-year low.

Although President Felipe Calderon this week tried to talk up the peso, saying the government had unprecedented international reserves and has paid down the bulk of its dollar-denominated debt, the currency has still lost around a quarter of its value since early August.

ENOUGH AMMUNITION?

The bank has sold $8.9 billion since Wednesday, over 10 percent of the $84 billion it reported holding as of Oct. 3.

Mexico last sold dollars in large amounts to support the peso during the Russian financial crisis of 1998.

"It will be difficult for the central bank to stem the tide," said Dustin Reid, currency strategist at ABN AMRO in Chicago.

However, Alberto Ramos, a senior economist at Goldman Sachs in New York, was more optimistic about the ability of the central bank to halt the peso's fall.

"They have plenty of ammunition to stabilize the market," he said.

Analysts warned that the continued fire sale of emerging market assets could overwhelm the bank's reserves if volatility continues at the current pace through the next month.