* MSCI Latam FX index on track for worst day since late-Sept * Oil prices lift Colombian peso * Colombia"s new deficit forecast raises downgrade prospect -CS * MSCI EM FX index set for worst day in nearly one year (New throughout, updates prices, market activity and comments) By Susan Mathew and Ambar Warrick March 5 (Reuters) - Latin American currencies fell on Friday as a rise in U.S. bond yields, on the back of strong payrolls data, hurt appetite for emerging market debt and set most assets in the space for steep weekly losses. The MSCI"s index of Latam currencies fell 1.9% and was set for its biggest daily decline since late-September. Broader emerging market currencies were set for their biggest daily loss in nearly a year. Both indexes marked weekly losses, as U.S. bond yields kept rising after February U.S. payrolls data topped expectations. A rise in nominal and real U.S. yields over the past three days pressured emerging market hard-currency bonds. The premium demanded by investors to hold hard-currency EM sovereign debt over safe-haven U.S. Treasuries has risen by 7 points to 358 points since Wednesday. "If you have a global rise in yields, fixed income is clearly not going to have a good year," said Viktor Szabo at Aberdeen Standard Investments. In Latam, Brazil"s real fell 0.4%, while Mexico"s peso fell 0.9%. Both currencies were set to lag their regional peers for the week as investors grew concerned over the advent of populist government policies in Latam"s top two economies. Data showed industrial production in Brazil rose in January at the slowest rate in nine months, another indication the recovery was losing steam. A new COVID-19 strain in Brazil caused record-high deaths in recent days and also has kept investors on edge over the country"s economic prospects. The Colombian peso slid as much as 0.7% before rising 0.3%, as crude prices hit 14-month highs after OPEC+ decided to extend output cuts. The currency was the sole weekly gainer in Latam. Colombia"s 2021 fiscal deficit forecast on Thursday came in well above market expectations, with the finance ministry changing its projection for the deficit to 8.6%, from a previous deficit prediction of 7.6%. "The revision of the 2021 fiscal deficit increases the importance of presenting an ambitious fiscal reform in the short-term," said Credit Suisse analyst Juan Lorenzo Maldonado. "Without strong and actionable guidance in the short term, Colombia may be unable to avoid a downgrade in its sovereign debt ratings to below investment grade status by either Fitch or S&P before the end of the year." Latam stocks fell, but were set for mild weekly gains, having sidestepped a global equities rout due to relatively lower valuations. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 1337.85 -0.63 MSCI LatAm 2249.37 -0.86 Brazil Bovespa 115061.52 2.1 Mexico IPC 46165.03 0.35 Chile IPSA 4706.37 0.12 Argentina MerVal 47314.27 -1.033 Colombia COLCAP 1343.25 0.46 Currencies Latest Daily % change Brazil real 5.6850 -0.44 Mexico peso 21.3004 -0.86 Chile peso 732 -0.05 Colombia peso 3633.4 0.27 Peru sol 3.6898 -0.22 Argentina peso 90.3600 -0.07 (interbank) (Reporting by Susan Mathew in Bengaluru and Karin Strohecker in London; Editing by Dan Grebler and David Gregorio)