Updates with afternoon trading

By Utkarsh Hathi, Purvi Agarwal and Niket Nishant

July 13 (Reuters) - Latin American assets declined on Monday as escalating U.S.-Iran tensions tempered risk appetite and raised concerns about the potential inflationary impact of higher oil prices.

The U.S. and Iran exchanged missile and drone attacks on Monday, dampening hopes for a quick resolution to the conflict. Oil prices climbed 8.76% after U.S. President Donald Trump said Washington was reinstating a blockade on Iran.

"The bigger issue is how sustained energy pressure will constrain central banks' ability to react. We do not see a repeat of the March/April shock, but the move is still enough to challenge the benign rates backdrop," said Geoff Yu, a strategist at BNY.

"If oil pressure persists, the market will have to price in a less comfortable mix of sticky inflation, weaker consumption and reduced policy flexibility."

In Latin America, most equity benchmarks started the week on a shaky footing. Chilean stocks .SPIPSA slipped 1.13%, the steepest drop among peers, while the peso CLP= slipped 0.83% against the dollar.

Stocks in Brazil .BVSP, Latin America's largest economy, were down 1.11%, but losses were contained by a 2.85% rise in oil giant Petrobras PETR4.SA.

The regional heavyweight's economy is expected to grow moderately after October's presidential election, suggested a Reuters poll, with analysts saying efforts to narrow budget deficits next year may again hinge on tax hikes rather than expenditure cuts.

Mexican equities .MXX fell 0.86%, while the broader MSCI Latin American stocks index .MILA00000PUS declined 1.16%. The corresponding currency equivalent .MILA00000CUS edged down 0.27%.

Markets are awaiting inflation readings from the U.S., due on Tuesday, that would shape the Federal Reserve's decision on interest rates later this month, with the new chair slated to appear before Congress this week.

With geopolitical tensions at the forefront again, focus will be on inflation in major economies, though limited exposure to AI heavyweights has largely shielded the region from a global tech selloff.

"Latin America provides some differentiated exposure. If there are some AI disappointments, it can add some diversification value to portfolios," said Angelo Kourkafas, senior global investment strategist at Edward Jones.

Recent inflation readings in Latin America have painted a mixed picture, with price pressures running hot in Colombia, Chile and Peru, strengthening bets that central banks will maintain a hawkish stance.

Brazil and Mexico, on the other hand, have seen falling inflation, with many expecting a 25-basis-point cut in Brazil at the central bank's next meeting.

Brazil's real BRL= was 0.38% lower and currencies in Peru and Mexico were also subdued.

In Chile, the fast-tracking of its pro-growth mega bill, along with other reforms, should support investment and lift its gross domestic product to 3% next year, said BofA analysts in a note.

Key Latin American stock indexes and currencies:

Equities	Latest	Daily % change
MSCI Emerging Markets .MSCIEF	1649.76	-2.42
MSCI LatAm .MILA00000PUS	2995.93	-1.16
Brazil Bovespa .BVSP	175885.82	-1.11
Mexico IPC .MXX	65927.18	-0.86
Chile IPSA .SPIPSA	10932.12	-1.13
Argentina MerVal .MERV	3258368.27	-0.666

Currencies	Latest	Daily % change
Brazil real BRL=	5.1283	-0.38
Mexico peso MXN=	17.5131	-0.28
Chile peso CLP=	931.52	-0.83
Peru sol PEN=	3.4071	-0.49
Argentina peso (interbank) ARS=RASL	1,482.0	0.40
Argentina peso (parallel) ARSB=	1,505.0	0.33