Mexico peso firms on US rate outlook; stocks slip

(Recasts with stock market drop, adds detail)

MEXICO CITY, April 2 (Reuters) - Mexico's peso firmed to a two-year high on Wednesday after the Federal Reserve chief said a U.S. recession was possible, spurring bets on further U.S. interest rate cuts, while stocks slipped on profit taking,

The peso currency <MXN=> MEX01 strengthened for a fifth straight day, gaining 0.32 percent to 10.5615 per dollar.

The benchmark IPC stock index .MXX dipped 0.17 percent to 31,732 points, after earlier rising more than 1 percent.

Fed Chairman Ben Bernanke told a U.S. congressional committee the U.S. economy could face a mild recession and said the Fed was prepared to act to keep the economy growing.

A rate cut in the United States would make assets denominated in pesos more attractive to yield-hungry investors given the higher interest rates prevailing in Mexico.

"Bernanke seemed to say the end of rate cuts is in sight, but they are not over yet," said a peso trader in the northern Mexican city of Monterrey.

The price of the benchmark 10-year government peso bond <MX10YT=RR> fell 0.07 of a point to bid at 101.776, pushing its yield up 1 basis point to 7.49 percent.

Stock traders said investors were booking profits after three straight days of gains in the share market, which neared historic levels in early trade before Bernanke's comments.