Mexican markets fell sharply on Tuesday, following a steep drop in U.S. Treasury prices as investors worried about the possibility of higher global interest rates.

The peso currency slipped 0.25 percent in local trading to 10.9325 per dollar, but dropped another 0.52 percent after the official central bank close to 10.99 per dollar.

The benchmark IPC stock index gave up 0.71 percent to 31,608.59 points.

Rates in the U.S. bonds market keep on rising and investors are looking for better yields outside of Mexico, said a stock trader in Mexico City.

The price on the benchmark 10-year government peso bond fell 0.628 point to bid 101.296, for a yield of 7.79 percent, its highest level since early May. The bond's yield, which moves inversely to its price, was up 10 basis points.

U.S. bonds have taken a beating over the last week, and continued their fall on Tuesday on worries about global inflation and the prospect of rising interest rates worldwide.

We had been seeing yields rise for months, but the problem now is the speed with which they have risen in the last few days, said a bond trader in Mexico City.

Higher U.S. yields make emerging market assets like Mexican stocks and bonds less attractive to investors.

In stock trading, dominant cell phone operator America Movil dragged hardest on the index, closing 1.05 percent lower at 33.14 pesos. Its New York traded shares were off 1.5 percent at $60.32.

Shares of Cemex, the world's No. 3 maker of cement, dropped 0.95 percent at 42.61 pesos, while its New York traded shares were down 1.92 percent at $38.78.

Fixed line giant Telmex dropped 1.92 percent to 21.50 pesos. Its New York traded shares slumped 2.77 percent to $39.03.

On the winning side, shares in airport operator OMA rose 2.10 percent to 38.37 pesos after UBS raised its rating the company to buy from neutral.

Leading retailer Wal-Mart de Mexico (Walmex) rose 0.43 percent to 42.53 pesos.

Mexico