UPDATE 3-Brazil finmin voices support for weaker real

* Real appreciated 34 percent last year, irking exporters

* Intervention could take various forms, such as swaps

* Minister "daring the market to take the real higher"

* (Adds background, analyst comments, byline)

By Isabel Versiani

BRASILIA, July 27 (Reuters) - Brazil's finance minister Guido Mantega on Tuesday renewed government efforts to talk down strength in the country's currency, voicing his support for central bank intervention in foreign exchange markets and making a case that the real could weaken in the medium-term.

"When the central bank thinks it's the right time, they'll act," Mantega said at a news conference.

The real's strength has worried the government, which last year instituted a capital inflows tax to try to brake the real's gains. The currency appreciated 34 percent against the dollar last year, prompting protests from exporters.

While the currency has weakened about 1 percent since the start of this year, it has recently begun firming against the dollar again, despite daily spot market auctions by the central bank to buy dollars.

Markets have been abuzz with speculation that the central bank could step up interventions in the foreign exchange markets. The bank itself informally sounded out demand for reverse currency swaps last week.

"Mantega is pretty much daring the market to take the real higher," Win Thin, a strategist at Brown Brothers Harriman in New York, said in a note.

The swaps are a form of derivative that would let the bank take a long dollar position in the futures market in exchange for a short position in the interest rate markets.

Brazil's central bank first offered reverse swaps in the currency markets in 2005 and stopped using them on a regular basis in September 2008.

"The current back-drop is ripe for the re-introduction of reverse swaps," wrote Flavia Cattan-Naslausky of RBS in a note to clients dated Tuesday. "Spot auctions have run the course of their effectiveness on their own once that pressure for currency appreciation is coming mostly from the derivatives markets."

The central bank has been reluctant to use derivatives due to their lack of transparency, analysts said. Unlike daily U.S. dollar purchases, which are ostensibly used to increase the bank's international reserves, currency derivatives could be seen as a more direct form of intervention in the market, sparking volatility.

Mantega said the government is not currently considering any new regulatory measures to contain the real's strength.

But some analysts expect that further currency strength will be met with currency controls, similar to the capital inflows tax (IOF).

"Mantega claimed that the 2009 IOF tax was successful and has kept the exchange rate above 1.70, which to us contains the implicit threat that further currency strength can be met with more capital controls," added Win Thin.

Mantega repeated that the currency could be set to weaken in the medium term. He said that some banks may be overlooking the sharp drop in Brazil's June current accounts, to a bigger-than-expected deficit of $5.2 billion.

"Market conditions themselves should add to the weakening of the real," Mantega said, without elaborating.

Brazil's currency, the real BRBY, weakened 0.06 percent on the spot market in afternoon trading, to a bid quote of 1.766. (Additional reporting by Luciana Lopez, and Samantha Pearson in Sao Paulo; Editing by Eric Walsh)