Updates with mid-session prices

By Nikhil Sharma and Pranav Kashyap

June 18 (Reuters) - Latin American assets slipped on Wednesday as traders awaited an interest rate decision from Brazil's central bank against the backdrop of escalating Middle East turmoil .

MSCI's index for Latin American currencies .MILA00000CUS slipped 0.3% while a similar gauge of the equities .MILA00000PUS lost 0.2%.

Geopolitical risk loomed, as the threat of U.S. intervention in the Israel-Iran conflict sent a jolt through global markets, following President Donald Trump's demand for Tehran's unconditional surrender, a move swiftly dismissed by Iran's Supreme Leader, Ayatollah Ali Khamenei.

As fighting raged into its sixth day and Israeli jets thundered over Tehran, thousands fled the Iranian capital, injecting fresh volatility into an already unsettled landscape.

According to a source with knowledge of internal discussions, Trump and his advisers are actively mulling options, including possible joint strikes with Israel on Iranian nuclear facilities.

Against this backdrop, the Brazilian real BRL= was flat, while Sao Paulo's benchmark stock index .BVSP edged down 0.2%.

All eyes were on Brazil's central bank, with the market consensus pointing towards a rate-hike pause after an aggressive tightening cycle that began in September 2024, pushing interest rates to a near 20-year high at 14.75%.

The monetary authority finds itself walking a tightrope, cooling off a red-hot economy while navigating the ripple effects of Trump-era tariffs.

Inflation remains stubbornly above target, and this week's stronger-than-expected activity data means a surprise rate hike can't be ruled out.

"Given the already restrictive monetary policy, the risk of sharp interest rate cuts in the near future is also reduced. This would be a positive development for the Brazilian real," said Michael Pfister, FX analyst at Commerzbank.

Meanwhile, the U.S. Federal Reserve kept rates unchanged at 4.25-4.50%. Policymakers signaled rate cuts are on the horizon, but the trajectory is now less dovish, as inflationary pressure from Trump's tariff plans tempers expectations.

"Markets appear to be settling on a (slight) hawkish interpretation of the Fed festivities," said Matthew Weller, global head of research at StoneX.

Elsewhere in the region, Chile's central bank left its benchmark rate unchanged at 5%, as annual inflation still sits above its 2% to 4% comfort zone. The Chilean peso CLP= gained 0.2%, while Santiago stocks .SPIPSA slipped 0.4%.

Mexico's peso MXN= slipped 0.2% against the dollar, as traders braced for next week's Bank of Mexico meeting, where a fourth consecutive 50-basis-point cut is widely anticipated.

Data showed Mexican private spending dipped 0.4% in Q1 from the previous quarter. The local equity index .MXX inched up 0.1%.

Colombia's peso COP= jumped 0.4% to a three-month high, while 1.3% gain was seen in the benchmark stock index .COLCAP.

Colombia's Senate, meanwhile, approved a revised labor reform bill after President Gustavo Petro called for a referendum to secure public backing for the initiative.

Argentina's main stock index .MERV lost 0.8%, while the Argentine peso ARS= jumped 2%.

Key Latin American stock indexes and currencies:

(Reporting by Nikhil Sharma and Pranav Kashyap; Editing by Ed Osmond and Mohammed Safi Shamsi)

((Nikhil.Sharma@thomsonreuters.com;))