* Brazilian retail sales rise to highest on record in August * Knee-jerk response to U.S. vote in EM may be limited -GS * Mexican peso reverses declines to extend gains to second day * Colombia central bank could add liquidity measures (Updates prices throughout, adds comments) By Shreyashi Sanyal Oct 8 (Reuters) - Brazil"s real reversed declines to trade higher on Thursday after a record reading on retail sales, although worries lingered about the country"s public finances. The real rose 0.6% in volatile trading after falling earlier in the session. Data showed Brazilian retail sales rose to their highest on record in August, as economic activity continued to recover from the worst of the nationwide lockdown measures from earlier this year. This comes after a report earlier in the week which showed a pick-up in the Brazil"s services sector during September. Despite recent economic green shoots, investors worried about a new fiscal package, known as Renda Cidada, exceeding the government"s spending limit after a volley of mixed information. "The (Brazilian) government"s intention to create a new social welfare program poses additional risk to the trajectory of the public accounts," economists at Credit Suisse noted. "Despite the government"s decision to revise the proposal after strong backlash, the source of funding for the new program remains uncertain. The main concern is the observance of the spending cap." Mexico"s peso rose 0.3%, extending gains to a second day. Investors were optimistic of a new infrastructure investment plan unveiled by the government earlier in the week, worth nearly $14 billion. Analysts at UBS said the peso also remains exposed to global conditions, which for now are expected to be supportive thanks to the increased likelihood of a Democratic sweep in the U.S. presidential election, ultra-loose fiscal and monetary policies, and the expected approval of a coronavirus vaccine. Mexican equities surged 2.3% to touch a near seven-week high, while the MSCI"s index for Latin American stocks gained 2.7%. Goldman Sachs said lighter investor positioning in emerging markets heading into the U.S. presidential election than before the 2016 vote suggests "knee-jerk" reactions to the outcome may be contained. Argentina"s peso steadied after hitting a record low in the previous session. The currency was exposed to a fresh bout of selling pressure after the country"s central bank said last week it would allow a managed float of the peso and would abandon its "uniform daily devaluations and introduce greater volatility." Colombia"s central bank board could still use whatever tools at its disposal to buoy up the economy amid fallout from a long coronavirus lockdown, a board member said on Thursday. The Colombian peso added 0.1%. Key Latin American stock indexes and currencies at 1927 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1118.15 0.93 MSCI LatAm 1904.41 2.7 Brazil Bovespa 97822.73 2.4 Mexico IPC 38259.63 2.25 Chile IPSA 3650.35 1.73 Argentina MerVal 45186.46 0.998 Colombia COLCAP 1180.32 0.5 Currencies Latest Daily % change Brazil real 5.5881 0.62 Mexico peso 21.3935 0.28 Chile peso 798.2 -0.38 Colombia peso 3838.69 0.10 Peru sol 3.5797 -0.31 Argentina peso (interbank) 77.1100 0.00 Argentina peso (parallel) 154 0.65 (Reporting by Shreyashi Sanyal in Bengaluru; Editing by Alistair Bell and Andrea Ricci)