EMERGING MARKETS-Latam stocks stumble as Spain woes weigh

* Bovespa down 1.27 pct, Mexico's IPC off 0.59 pct

* Chile notches gains as Falabella gains for 3rd day

* Grupo Mexico slumps after UBS cuts stock to sell (Updates to close)

By Luciana Lopez and Michael O'Boyle

SAO PAULO/MEXICO CITY, Dec 15 (Reuters) - Latin American stocks fell on Wednesday as concerns about a possible broadening of the European debt crisis pushed investors to dump riskier assets ahead of the year's end.

The MSCI Latin American stocks index <.MILA00000PUS> lost 0.89 percent after gaining in the two previous sessions.

Stoking risk aversion, ratings agency Moody's warned Spain on Wednesday that its debt rating could be downgraded, the latest chapter in an ongoing European debt crisis that has roiled financial markets throughout the year. [ID:nLDE6BE0B8]

"Everything's a reason to book profits here now," said Hamilton Moreira, senior analyst with BB Investimentos in Sao Paulo. "The issue comes down to one thing: Foreigners are pulling out."

Brazilian equities surged 83 percent last year, getting more expensive relative to other lagging markets around the world, Moreira noted. Short-term prospects in other parts of the world are now luring away foreign liquidity, he said.

The Bovespa index <.BVSP> moved down 1.27 percent on Wednesday, dropping into the red for the year.

Heavyweight commodity companies led the Bovespa lower. State-controlled energy company Petrobras retreated 1.78 percent. Mining company Vale , the world's largest producer of iron ore, gave up 0.77 percent.

Steelmakers also fell, with Gerdau moving down 1.39 percent, Usiminas 2.25 percent and CSN 3.36 percent.

Mexico's IPC stock index <.MXX> fell 0.59 percent, retreating from a record high close in the previous session.

Shares of mining company Grupo Mexico fell 2.59 percent. UBS cut the shares to sell from neutral, saying a recent surge in the shares, backed by record copper prices, had pushed the share price above the bank's "sum of the parts" valuation model.

"A lot of the stocks in the IPC have overshot their price targets ... providing some signals that they are overbought and possibly we could see an adjustment period," said Eduardo Avila, an analyst at brokerage Monex.

Shares in America Movil , the flagship telecommunications firm of billionaire Carlos Slim, shed 1.13 percent.

Looking on a longer-term horizon into next year, analysts at Bulltick Capital Markets said Mexico would outperform Brazil next year, as it has in 2010, on signs the U.S. economy is improving.

"We expect Mexico's equity market to once again outperform Brazil's equity market in 2011 ... following comparatively better U.S. fundamentals and the fact that the Brazil trade seems crowded," Bulltick analysts wrote.

Chile's IPSA index <.IPSA> rose 0.59 percent, adding to gains in the previous session and shrugging off the gloom in other markets.

"Outside (of Chile) things were bad, but at the local level there was a buy recommendation for Falabella," said Juan Pablo Ebel, a trader at brokerage BCI.

Retailer Falabella jumped 2.91 percent, bringing its gains since Monday to nearly 8 percent after Bank of America recommended the stock as a "buy."

Rival retailer Cencosud rising 0.89 percent. (Additional reporting by Felipe Iturrieta in Santiago; Editing by Diane Craft)