Feb. 24 (Bloomberg) -- The Philippine peso had its biggest drop in more than three years as President Gloria Arroyo declared a state of emergency after the military said it foiled a plot to oust her government. Stocks and bonds slumped.

The peso fell 1.05 percent to 52.20 at the 4 p.m. close of currency trading in Manila. That's its biggest decline since July 27 2002, according to the Bankers Association of the Philippines. The benchmark stock index slid 1 percent to 2069.93.

``It doesn't bode too well,'' said Thio Chin Loo, a senior currency analyst at BNP Paribas in Singapore. ``The news suggests that there's some control over the situation, but it also means some soldiers are rebelling against the authority.''

Arroyo said in a televised address she is giving the military police powers to maintain order as authorities break up a group planning to establish an ``extra-constitutional regime.'' The military said earlier it thwarted a plan by some soldiers to join protest rallies seeking Arroyo's resignation.

The peso, which had the biggest fluctuation of any currency in the world today, dropped on concern the political upheaval may threaten the government's goal of ending budget deficits by 2008. The peso was Asia's biggest gainer in 2005 and Philippine bonds were also the region's best performers as the government passed tax increases and improved its finances.

Peso Drops

``There are pressures on the currency because of what's happening,'' Philippine central bank Deputy Governor Diwa Guinigundo said in Manila. ``We are in the currency market to reduce the volatility.''

Philippine five-year local-currency bonds posted their biggest loss in more than seven months. The yield on the five- year bond rose 17 basis points, or 0.17 percentage point, to 8.48 percent at the 4:00 p.m. close in Manila, according to the Money Market Association.

Soldiers including Brigadier General Danilo Lim, commander of the Philippine Army's elite Scout Rangers, have been arrested in connection with the planned mutiny, Armed Forces Chief of Staff Generoso Senga told ABS-CBN News Channel today. Whether they planned to grab power ``is something we will have to determine later on,'' he said.

``We are holding off buying right now until things have settled,'' said John Padilla, who helps manage about $2.8 billion at Metropolitan Bank & Trust Co. in Manila. ``People are worried about political stability, but the market isn't in a state of panic yet.''

Time to Buy?

The Philippine Stock Exchange Composite Index was Asia's worst performing benchmark index as of 5:27 p.m. in Manila with almost 17 stocks falling for every six that climbed. It fell as much as 2.1 percent to its lowest since Dec. 19 after Arroyo made her announcement.

``You have to always expect some sort of volatility of this kind in the Philippines,'' said Sally Yeo, who helps manage about $650 million at Pheim Asset Management in Singapore. ``If you think this won't last then it's a good time to add the Philippine stocks you are familiar with.''

The Philippine economy, equivalent to less than 2 percent of Japan's, is the smallest among 14 markets in the Asia Pacific. A third of its 86 million people live on less than 60 U.S. cents a day and it has one of the highest jobless rates in the region at 7.4 percent.

Today's losses in the capital markets, which wiped out $423 million worth of stock market value, will probably be temporary, according to some investors including Metrobank's Padilla.

``The business sector and most of the military are still behind Arroyo so this is just a continuation of last year's noise that escalated a bit,'' Padilla said.

Power Grabs

Previous attempts to depose Arroyo have failed. In 2001, she declared a ``state of rebellion'' to arrest alleged plotters that encouraged protesters to storm the presidential palace, four months after she came to power after a civilian-military revolt. The restrictions lasted for four days.

Arroyo quashed a power grab in July initiated by some of her Cabinet secretaries, who believed allegations she cheated in the 2004 elections. In 2003, she ended in about a day an attempted mutiny of 300 soldiers demanding her resignation.

The police earlier today dispersed a rally near the military headquarters in Manila. Separately, a crowd of about 8,000 protesters, led by former President Corazon Aquino, have gathered in Makati, the nation's financial district.

Arroyo, who was first swept into power by a military- civilian uprising in 2001, has faced calls for her resignation since June over allegations she rigged the 2004 election and that her family profited from illegal gambling.

The president, who denied the charges, beat an impeachment move against her in September, after her allies in Congress outvoted opponents by 158 to 51.

``One way of riding volatility in the Philippines is to stick with stocks you are familiar with,'' Pheim Asset's Yeo said. The fund may add to its stock holdings in Manila, she said, without naming the Philippine stocks it holds.

To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net

Last Updated: February 24, 2006 05:03 EST