Updates with mid-session prices

By Pranav Kashyap and Sruthi Shankar

June 20 (Reuters) - The Brazilian real lost ground on Friday but still looked poised to notch its third straight week of gains after a surprise interest rate hike earlier in the week, while tumbling crude prices dragged down the Mexican peso.

The MSCI index of Latam currencies .MILA00000CUS touched a record high earlier this week, but choppiness in crude and foreign exchange markets as a result of the Israel-Iran conflict, particularly for the dollar, has weighed on sentiment since.

The Mexican peso MXN= slid to a two-week low against the dollar on Friday as Brent crude prices plunged nearly 3% after the White House postponed a decision on U.S. involvement in the ongoing conflict. Oil is a key export for Mexico.

Oil prices had soared almost 3% the day before after Israel struck nuclear targets in Iran and Iran, OPEC's third-largest producer, retaliated with missiles and drones. With both sides showing no signs of de-escalation, markets remained on edge.

Mexico's IPC .MXX eked out a modest 0.4% gain, but still looked set for its roughest week in almost three months.

Banxico faces a tough balancing act at next week's rate meeting, as recent data showed inflation racing past its 3% target. Beneath the surface, however, Mexico's economy only just dodged a technical recession in the first quarter and now grapples with sluggish domestic demand and jitters over U.S. trade policy.

Meanwhile, Brazil's real BRL= edged down to 5.52 per dollar as traders returned from a holiday, though it had briefly touched an eight-month high of 5.47.

The currency's recent strength follows a surprise move by Brazil's central bank, which hiked interest rates by 25 basis points to 15%, its highest level since July 2006 and the seventh consecutive increase.

The bank signaled that borrowing costs are likely to stay elevated, challenging expectations that the tightening cycle was over, as stubborn inflation and red-hot economic data keep policymakers vigilant.

"We suspect that Brazil's central bank would probably only deliver further hikes if the war in the Middle East lead to a surge in oil prices or if the government loosens fiscal policy significantly ahead of next year's election," said Kimberley Sperrfechter, emerging markets economist at Capital Economics.

"The hawkish commentary is probably aimed at preventing investors from pricing in rate cuts."

Sao Paulo's benchmark index .BVSP tumbled 1.2%, on track for its sharpest daily drop in nearly a month.

Meanwhile, Colombia's peso COP= and stocks in Bogota .COLCAP were flat as markets digested the Colombian Senate's approval of a revised, much-debated labor reform package.

Facing sluggish tax revenue, high debt, and limited options to cut spending, Colombia's central bank is widely expected to keep interest rates unchanged in its meeting next week.

Key Latin American stock indexes and currencies:

(Reporting by Sruthi Shankar and Pranav Kashyap in Bengaluru; Editing by Nia Williams)

((sruthi.shankar@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 6182 2787; pranav.kashyap@tr.com))