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UPDATE 1-Colombian peso, stock index down on S&P downgrade

(Adds peso close, updates stock index)

BOGOTA, May 20 (Reuters) - Colombia’s peso currency and main stock index fell on Thursday amid higher risk aversion after S&P Global Ratings downgraded the Andean country’s credit rating.

The agency lowered its long-term foreign currency rating on Colombia to BB-plus from BBB-minus on Wednesday, saying it believes the country’s fiscal adjustment will be more protracted and gradual than previously expected. It added that its outlook on the country is stable.

Colombia’s peso closed down 0.92% at 3,718.80 per dollar after falling as much as 2.04% during trading.

Main stock index COLCAP was down 1.43% to 1,247.50 points two hours from closing.

“We anticipated a negative price reaction in the Colombian financial markets today, but we think it will be of short duration,” said Andres Pardo, chief of Latin America strategy for XP Investments, citing a long-time expectation the country would lose investment grade.

Colombia will accelerate economic growth, establish financial stability and build consensus to finance social programs, Finance Minister Jose Manuel Restrepo said after the decision.

“This decision will create a negative reaction from the markets in the coming days, a more expensive dollar and very high interest rates,” Corficolombiana said in a note.

“We expect rates for long-term TES (bonds) to increase between 25 and 56 basis points,” it said, adding they could then decrease depending on local conditions.

Anti-government protests, which have already forced the withdrawal of tax and health reform proposals and the resignation of the finance minister, have stretched into a fourth week.

The national strike committee - made up of unions and student groups - is set to meet on Thursday with the government to hash out terms for a negotiation to end the protests.

Wall Street banks JPMorgan and Morgan Stanley predicted on Thursday Fitch would downgrade Colombia’s credit rating to junk before the year is out and spark forced selling. (Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb; Editing by Will Dunham)

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