Mexico stocks drop on US economy worries, peso flat

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MEXICO CITY, March 14 (Reuters) - Mexico's stocks slumped on Friday, although the peso was stable, as trouble on Wall Street increased worries about the U.S. economy and after Mexico's central bank held its key overnight rate steady.

The benchmark IPC index .MXX fell 1.95 percent to 29,186 points, dragged down by a steep drop at cement maker Cemex.

Traders said liquidity problems at U.S. investment bank Bear Stearns had heightened worries that a crisis in the U.S. housing and credit markets could deepen further.

The peso <MXN=> MEX01 was flat at 10.7495 per dollar.

In debt trading, the benchmark 10-year government peso bond <MX10YT=RR> rose 0.347 of a point to bid 101.575, pushing its yield down 5 basis points to 7.52 percent.

At its monthly review, Mexico's central bank kept its key overnight rate at 7.50 percent as it balances higher inflation with the negative effect of the U.S. slowdown on the Mexican economy. The central bank said the risk had increased of the Mexican economy slowing more than expected.

Heightened expectations of a significant interest rate cut at the next meeting of the U.S. Federal Reserve on March 18 are making the spread between Mexican and U.S. bonds more attractive to investors, one bond trader said.

In local stock trading, Cemex (CMXCPO.MX: Quote, Profile, Research) shares plunged 7.96 percent to 27.87 pesos after a disappointing results forecast for the first quarter, traders said. The company's U.S. traded shares (CX.N: Quote, Profile, Research) fell 8.4 percent to $25.83.