(Adds details on currencies, Mexico, Chile rate hikes) By Bruno Federowski SAO PAULO, Dec 17 (Reuters) - Latin American currencies were mostly steady on Thursday as traders took an increase in U.S. interest rates as a sign of confidence in the world's largest economy, though the Argentine peso plunged after the government lifted currency controls.
Argentina's peso slid over 26.5 percent, its biggest one-day loss in decades, after the country's new government floated the currency. Newly inducted President Mauricio Macri has promised to implement free-market reforms to try to revitalize the stagnant economy.
"Overall, it appears the government's main goal is to manage the one-off peso devaluation while minimizing the risk of FX overshooting," JP Morgan analyst Iker Cabiedes wrote in a client note.
Trade in other markets was muted a day after the U.S. Federal Reserve raised benchmark rates for the first time in nearly a decade, prompting others to follow suit.
The Bank of Mexico increased its key lending rate by 25 basis points, its first hike in seven years, in a bid to prop up the Mexican peso , which has slumped against the greenback this year.
The currency initially rallied before closing 0.45 percent lower at 17.0495 pesos per dollar.
Chile's central bank also raised its benchmark interest rate by 25 basis points to 3.50 percent, and the Chilean peso closed up 0.01 percent at 708.30 per dollar.
Although higher U.S. rates could pull investment flows away from emerging markets, Latin American currencies mostly firmed after the Fed announcement. Traders took comfort in Fed Chair Janet Yellen's assurance that the U.S. central bank will proceed slowly with any further hikes.
Wall Street's top banks expect the Fed to next raise rates in the first quarter of next year, a Reuters poll showed.
"For the market, this is the best of both worlds," said Reginaldo Galhardo, head of foreign exchange trading at Treviso brokerage in São Paulo.
The Brazilian real, which had already closed at the time of the Fed announcement on Wednesday, rose 0.9 percent while the country's Bovespa stock index advanced 0.55 percent.
Shares of Brazil's Grupo BTG Pactual SA jumped 7.6 percent after a Supreme Court Justice said that André Esteves, the bank's former chief executive, will be released from prison. Esteves has been in jail since Nov. 25 on charges of seeking to obstruct a corruption probe.
Latin American stock indexes and currencies at 2230 GMT: Stock indexes Latest Daily YTD pct pct change change MSCI Emerging Markets 798.59 1.04 -16.49 MSCI LatAm 1,893.43 0.95 -30.58 Brazil Bovespa 45,261.48 0.55 -9.49 Mexico IPC 43,503.52 0.17 0.83 Chile IPSA 3,663.05 1.20 -4.88 Chile IGPA 18,048.73 1.08 -4.35 Argentina MerVal 11,938.33 -0.81 39.16 Colombia IGBC 8,506.65 1.12 -26.89 Venezuela IBC 14,463.57 -0.35 274.83 (Reporting by Bruno Federowski, editing by G Crosse)