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* Brazilian real falls in afternoon trading * Chilean peso rises for second session * MSCI's EM stocks index hits record high (Updates prices throughout, adds comments) By Shreyashi Sanyal Jan 21 (Reuters) - Brazil's real reversed early gains to trade 1% lower on Thursday as investor attention moved to worries about the country's fiscal policy reform, a day after the central bank removed its "forward guidance" to keep interest rates low for a long time. The real fell by afternoon trading, on concerns about the government's financial state in the face of growing need for fiscal stimulus for an economy that was already weak before the pandemic. "Despite currently firmer prices, we continue to advise caution with regard to the Brazilian real," Commerzbank FX and emerging markets analysts Alexandra Bechtel and Melanie Fischinger wrote in a client note. Brazil's central bank on Wednesday kept rates steady at a record-low 2.00%. while the withdrawal of its guidance was seen by investors as showing the bank was becoming more data-dependent. Former central bank chief Arminio Fraga said Brazil faces a delicate balance this year between cutting its record budget deficit to soothe financial markets and keeping the spending taps open to support the economy. "Against the background of the historically low key interest rates level the BRL remains susceptible for the time being, and concerns about the fiscal policy discipline of the Bolsonaro government could also boil up again at any point in time," Commerzbank's Bechtel and Fischinger said. The Chilean peso rose 0.5%, extending gains for a second day as the dollar weakened and copper prices rose. However, concerns remained that demand growth for copper in top consumer China had for now reached a plateau. Mexico's peso fell 0.8%, with data showing the seasonally adjusted unemployment rate slipping to 4.4% in December. The currency has so far shown resilience to bouts of risk aversion. Sentiment across global risk markets was lifted as investors bet on more fiscal stimulus from new U.S. President Joe Biden, with a gauge from emerging market stocks hitting a record. An ultra-low interest rate environment, the rollout of coronavirus vaccines and signs of improving economic data have helped boost investor confidence in emerging market risk assets. However, a rise in U.S. Treasury yields has pressured currencies and bonds in emerging markets. The MSCI's index for Latin American stocks fell 1.5%, with Sao Paulo stocks dropping 0.5%. Brazilian steelmaker Companhia Siderurgica Nacional added 2.5% after a report said it plans to raise $1 billion by selling a stake in its unit CSN Mineracao with a target value of between 47.5 billion and 63 billion reais ($11.91 billion) in an IPO to be launched by Friday. Key Latin American stock indexes and currencies at 1858 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1405.13 0.3 MSCI LatAm 2430.00 -1.51 Brazil Bovespa 119099.35 -0.46 Mexico IPC 44749.77 -0.83 Chile IPSA 4593.06 -0.97 Argentina MerVal 48585.09 -3.264 Colombia COLCAP 1449.60 -0.7 Currencies Latest Daily % change Brazil real 5.3602 -0.95 Mexico peso 19.7389 -0.76 Chile peso 718.1 0.53 Colombia peso 3479.66 -0.42 Peru sol 3.6227 -0.22 Argentina peso (interbank) 86.4200 -0.08 Argentina peso (parallel) 153 1.96 (Reporting by Shreyashi Sanyal in Bengaluru Editing by Mark Heinrich)