Mexico peso, stocks hit by banking, oil worries

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MEXICO CITY, July 1 (Reuters) - Mexico's peso weakened sharply on Tuesday and local stocks fell as concerns mounted about credit losses in the financial sector and as investors feared rising oil prices would hurt the world economy.

The peso <MXN=> MEX01 weakened 0.7 percent at the central bank's final 1:30 p.m. local time (1830 GMT) reference to 10.38 per dollar, while the benchmark IPC stock index .MXX closed 0.59 percent lower at 29,221.11 points.

Global banking firms suffered heavy losses on Tuesday as markets were worried by talk of a possible profit warning by Deutsche Bank (DBKGn.DE: Quote, Profile, Research) and Merrill Lynch removed UBS (UBSN.VX: Quote, Profile, Research) from its "Europe 1 List."

"Risk aversion increased due to concerns on credit markets in general," said David Beker, head currency and debt strategist for Latin America at Merrill Lynch in New York.

Further unsettling markets was news of tension between the West and Iran, which pushed oil to a record closing price in New York.

Bourses fell sharply in Europe, China and across the Americas.

Traders said higher oil prices would hit U.S. consumers and undercut already slowing growth in the United States, Mexico's chief trading partner.

In local debt trading, bond yields fell for the first time in three days despite a survey by the central bank that showed analysts see Mexican inflation rising more than previously expected this year and in 2009.