Risk aversion drags down Brazil stocks, real slips

(Updates to close)

SAO PAULO Dec 8 (Reuters) - Brazilian stocks and currency fell on Tuesday, as global markets retreated in the face of increased risk aversion.

The benchmark Bovespa index .BVSP closed down 1.14 percent to 67,728.51 points, its biggest one-day drop since Nov. 26.

Brazil's currency, the real BRBY, hit its weakest point since Oct. 5, weakening 1.8 percent to 1.759 per dollar. The greenback, considered a safe-haven currency in times of turmoil, strengthened against a basket of major currencies .DXY.

"Risk aversion without a doubt is the key today," said Steven Butler, head of FX trading at Scotia Capital in Toronto. "Markets are very jittery."

The caution was due in part to Dubai, where Moody's Investors Service downgraded six Dubai-linked issuers on Tuesday after concluding the government would provide no "meaningful" support for top firms like DP World DPW.DI or Emaar Properties EMAR.DU. For more, see [ID:nGEE5B71LE]

Stocks fell globally on the uptick in investor wariness, with the Dow Jones industrials .DJI shedding 1 percent.

News of a possible debt default at a Dubai state-owned conglomerate roiled financial markets late last month, stoking fears of renewed global financial turmoil. Investors remain worried about the state of that debt as Dubai World tries to renegotiate with lenders.

Also on Tuesday, the stronger dollar pressured commoditie prices as the 19-commodity Reuters-Jefferies index .CRB shed 0.83 percent.

The Bovespa index includes a number of stocks tied to the trade in raw materials, including heavyweights Petrobras and Vale, which led losers on Tuesday.

State-controlled energy giant Petrobras (PETR4.SA) fell 2.11 percent to 37.59 reais, as crude oil CLc1 settled 1.77 percent lower on the back of the stronger dollar and concerns about a slowing recovery in energy demand.

Mining company Vale (VALE5.SA), the world's largest iron ore producer, declined 1.01 percent to 41.13 reais.

Brazilian banks also sank. Itau Unibanco (ITUB4.SA), Brazil's largest private-sector bank by assets, shed 0.5 percent to 39.85 reais, while Banco do Brasil (BBAS3.SA), Latin America's biggest bank by assets, moved down 0.64 percent to 30.90 reais.

Bradesco (BBDC4.SA) also dropped, losing 0.53 percent to 37.79 reais.

Yields on Brazilian interest rate futures contracts <0#DIJ:> ticked broadly higher.

The yield on the contract due January 2011 DIJF1 edged up to 10.42 percent from 10.38 percent. The yield on the contract due July 2010 DIJN0 edged up to 9.23 percent from 9.18 percent. Both were among the day's most actively traded contracts.

Investors use the contracts to bet on the country's benchmark interest rate, the Selic, currently at a record low 8.75 percent.

Central bank policymakers meet this week to consider changes to the rate. A decision is expected after the close of markets on Wednesday. Analysts expect the Selic to remain stable through year-end. [ID:nSPG002622]

However, a quickened pace in Brazil's economic recovery next year could result in inflationary pressures and prompt the central bank to hike rates.