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Mexico's peso has shed more than 11 percent since mid-March, hurt by fears that Europe's sovereign debt woes are worsening.

Meade said that once concerns about Europe calm down, the peso should retrace its losses to trade where it was before fears mounted that Greece might leave the euro zone. He also dismissed the need for a more active defense of the local currency.

"If this uncertainty disappears, we would expect the peso's equilibrium would be very similar to the equilibrium we saw before these elements of uncertainty were in the market," Meade said at the Reuters Latin America Investment Summit.

On Wednesday, the peso lost as much as 2 percent against the dollar to touch 14.1660, its weakest since the end of November. The peso had been trading stronger than 13 per dollar in February and March.

The Mexican peso is one of the most liquid emerging market currencies and its sharp slump has tracked a downturn in global markets due to concerns that debt troubles in the euro zone could spark another global financial crisis.

"What we have, and what will end up setting the value of our currency, is an economy where exports are growing, an economy where consumption and investment are growing," Meade said.

Other emerging markets such as Brazil and India have resorted to ad hoc market interventions to defend their currencies.

Mexico, one of the biggest proponents of free markets among emerging economies, has a transparent auction mechanism to sell up to $400 million when the peso loses more than 2 percent from the previous day's fix price, a mid-session reference.

STRONGER FOOTING

Meade said that Mexico still believed European policymakers would avoid a messy breakup with Greece and prevent contagion from spreading to other weaker European countries.

But in case Europe's troubles take a greater toll on the global economy, Meade said Mexico is in a strong position after tripling its emergency funds since 2008.

The central bank has amassed international reserves worth more than $154 billion and the country has the protection of a flexible credit line with the International Monetary Fund.

"We have solid structural conditions," Meade said. "We are certainly better prepared to face (a global crisis) than we were when we did not have these elements of strength."

Meade said the government's projection of 3.5 percent economic growth this year was "very well anchored," adding that U.S. growth was supporting Mexico. He said the growth outlook could be revised upwards if concerns about Europe fade.

"The environment that Mexico has today and the environment that surrounds us in the United States offer some bit of certainty," he said. Mexico sends nearly 80 percent of its exports to its northern neighbor.

Still, in the event of a deeper global downturn, Meade said Mexico will not be able to provide much fiscal stimulus to the economy. But he said the central bank could lower its benchmark rate from 4.50 percent, where it has held since mid-2009.

"Surely, as in the rest of the world, there could be space within monetary policy to construct a more accommodative environment if a scenario occurs that threatens growth," he said.

Mexico's 2012 budget limits this year's deficit to 0.4 percent of gross domestic product.

The finance ministry said on Wednesday that Mexico's public sector ran a fiscal surplus of 8.2 billion pesos in April. The country has racked up a deficit of 43.4 billion pesos so far this year, keeping it on track to meet its budget limit, the ministry said.

Meade said concerns about the health of Spanish banks would not spill over into Mexico. Subsidiaries of Spanish banks BBVA (BBVA.MC) and Santander (SAN.MC) are two of Mexico's top banks, but Meade said they were well capitalized.

(Additional reporting by Krista Hughes and Ana Isabel Martinez; Editing by Phil Berlowitz)

* Euro hits near 2-yr low vs dollar; dollar index at 20-mth high

* Focus on rising Spanish debt yields and risk of bailout (Recasts, adds quote)

By Anirban Nag

LONDON, May 30 (Reuters) - The euro bounced from near two-year lows against the dollar on Wednesday, after the European Commission called for sweeping reforms to restore investor confidence, but gains were likely to be fleeting on growing concerns about Spanish banks.

The European Commission said the euro zone should move towards a banking union and consider eurobonds and the direct recapitalisation of banks from its permanent bailout fund as it laid out year-long recommendations in a report.

The euro rose to as high as $1.24684 from a 23-month low of $1.24241 on trading platform EBS after the comments, but analysts said any bounce would only provide a fresh opportunity to sell the common currency.

"We will sell into this bounce as these proposals will take a long time and will entail changes to the treaty," said Geoffrey Yu, currency strategist at UBS.

Earlier the euro fell to its lowest since early July 2010, as real money and institutional investors stepped up sales of the currency. Their selling gathered pace as concerns grew about Spain's ailing banking sector and soaring borrowing costs, and after Italy was forced to pay dearly to sell debt.

The euro was seen highly vulnerable to further falls, with many analysts looking for a drop towards $1.20.

Concerns are growing that Spain may have to tap debt markets at a time when bond yields are near unsustainable levels. Market players fretted that it may be forced to seek an international bailout.

Adding to the euro's woes, Italian 10-year government bond yields topped 6 percent as sentiment on the indebted economy looked vulnerable to contagion from Spain's worsening problems.

"The euro is in an extremely vulnerable position and downside risks are very strong indeed ... The Spanish banking crisis has the potential to knock the stuffing out of the euro zone irrespective of the Greek election results," said Jane Foley, senior currency strategist at Rabobank.

"The issues for Spain are undoubtedly huge and most people are coming round to the idea that it will need to go outside of its borders for assistance. The longer it delays, the more the risk of a bank run."

More falls could see the euro test a reported options barrier at $1.2400. Below there it has little chart support until $1.2151, a low hit in late June 2010, and then the 2010 low of $1.1876.

The common currency also lost more than 1 percent against the safe-haven yen, taking it to a four-month low of 98.274 yen. It recovered to trade at 98.425 yen, still down 0.9 percent on the day.

DOLLAR BUOYANT

A government source told Reuters on Tuesday that Spain would likely recapitalise Bankia, which asked for 19 billion euros on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.

The euro's weakness benefited the safe-haven dollar and yen, helping the dollar index, which measures its value against a basket of currencies, rise to a 20-month high of 82.749.

Technical analysts said a monthly close about the 100-month average in the dollar index around 81.82 may herald a shift in the longer-term trend of the dollar and reverse a multi-year drift lower.

The dollar also rose to a 15-month high against the Swiss franc at 0.9666 francs on EBS.

The higher-yielding Australian dollar fell 0.7 percent to $0.9777, slipping towards a six-month low at $0.9690, after weaker-than-expected retail sales data underscored the case for interest rate cuts. (Additional reporting by Jessica Mortimer; Editing by Andrew Roche)