UPDATE 2-Brazil to increase primary budget surplus in 2010

* Brazil to raise primary budget surplus target in 2010

* Govt has no plans to use stimulus for electoral purposes

* Finance Minister concerned about US dollar inflows (Adds byline, quotes, details and context)

By Isabel Versiani

BRASILIA, Oct 8 (Reuters) - Brazil's government will increase its target for the primary budget surplus in 2010 to improve public finances as the economy rebounds, Finance Minister Guido Mantega said on Thursday.

Tax breaks and other types of fiscal stimulus have helped Brazil's economy, the largest in Latin America, emerge in the second quarter from a brief, six-month recession.

But the measures also took a toll on the country's fiscal accounts as tax revenue slumped but government spending kept up in order to stimulate growth.

Mantega sought to appease worries the government will become more spendthrift in the run-up to the 2010 elections.

"We will not use fiscal stimulus for electoral purposes," Mantega said in a speech at an event in Brasilia.

The country's primary budget surplus has narrowed in recent months, and alarm bells were raised by the government's tweaking of the target instead of cutting spending.

It revised the primary budget surplus target earlier this year to 2.5 percent of gross domestic product from 3.8 percent, with a 0.5 percent leeway for priority spending -- which meant that the government had to have a 2 percent primary budget surplus to meet its target.

Last month the government tweaked that minimum further to 1.56 percent of gross domestic product as it grappled with shrinking tax collection.

Investors use the primary budget surplus, which excludes interest payments, as a gauge of a country's ability to service its debt.

The government has said worries over the country's fiscal position are exaggerated and that tax revenue will rebound as growth picks up.

The economy is likely to have grown between 2 to 2.2 percent in the third quarter of this year, Mantega said, after 1.9 percent growth in the second quarter.

TOO HOT?

Market analysts surveyed weekly by the central bank have been revising up their growth expectations for Brazil and are now betting on zero growth this year, having long priced in a contraction.

Expectations have changed so rapidly that the fear now is that the recovery will come with price pressures, as data earlier on Thursday showing consumer prices in Brazil quickened in September.

But Mantega said there was no risk of the economy overheating and sees growth of less than 5 percent in 2010. The recent rise in interest rate futures is not founded on economic fundamentals, he said.

"In this scenario, there are no inflation pressures in the economy," Mantega said, adding that there was no need to raise rates.

The central bank slashed interest rates by 500 basis points this year to a record low of 8.75 percent and is not expected to raise rates until next year. An Australian rate hike this week boosted expectations that other economies already emerging from the doldrums would soon follow suit.

The country's quick rebound has also drawn a lot of attention in international markets, helping to attract a flood of U.S. dollars into the economy, Mantega said.

"With our reputation so high at the moment, sometimes I get worried because everyone is so eager to come here and invest," Mantega said. (Writing by Ana Nicolaci da Costa; Editing by Padraic Cassidy)