* Finance Minister Mantega says real could be weaker
* His comments briefly added to real's losses
* Central bank intervenes to reverse rapid plunge
* Intervention seen as tug war between Mantega, central bank
By Daniela Ades
SAO PAULO, Nov 23 Brazilian authorities gave conflicting signs on the future of the real on Friday, with the finance minister favoring a weaker currency to help local industry and the central bank stepping into the market to halt its plunge.
Finance Minister Guido Mantega drove the real sharply weaker in the morning when he told a group of business leaders in Sao Paulo that the exchange rate is at a "reasonable but not totally satisfactory" level to support industry.
"Today we have a different exchange rate policy," said Mantega, who in 2010 coined the expression "currency war" to complain about the strength of emerging market currencies.
"For the last four to five months we have had an exchange rate above 2 (reais per dollar), so that (level) is here to stay."
The real slid more than 0.8 percent to a 3-1/2-year low after his comments, prompting the central bank to quickly intervene.
The bank called a traditional currency swap auction, which emulates the sale of dollars in the futures market, driving the real back to below the 2.10-per-dollar mark -- widely seen as the limit of an informal trading band.
The central bank acted as Mantega's remarks caused sharp currency moves in an illiquid market, a government source said.
The apparent tug of war shows the difficult balancing act that the government of President Dilma Rousseff faces to bring the real to a level that helps local manufacturers and exporters become more competitive without further stoking inflation.
For Mantega and other members of the administration, a weaker real is key for the local industry to recover after a slew of stimulus measures failed to pull it out of its hole.
Only a day ago, central bank chief Alexandre Tombini warned the monetary authority was ready to defend the local currency from speculative bouts.
He said the bank could add liquidity to the market, which traditionally suffers from a scarcity of dollars at the end of the year, to prevent the real from weakening too much, too fast.
So far this month, the real stands among the currencies that lost the most in world markets, according to Reuters data. It has weakened about 2.5 percent, behind only the Japanese yen, the Indian rupee and the South African rand in a ranking of the 36 most traded currencies.
The real has depreciated about 10 percent this year but remains more than 20 percent stronger than in 2008.
For over a year now, Rousseff has battled to prevent the real from appreciating, in an attempt to protect a industry struggling with cheap imports from places like China.
Government interventions in the currency, which included raising taxes on foreign investors, have helped weaken and stabilize the real in a tight range of 2.0-2.1 per dollar in recent months.
Analysts see the government giving clear signs that it wants a slightly weaker range ahead.
"These comments signal that the government wants a weaker real, but without letting the depreciation get out control," said Ures Folchini, vice-president of the treasury of WestLB. "The big question here is, what is this new ceiling? 2.12 reais?"
DIFFERENT FOREX POLICY
Rousseff's No. 1 priority is to restore stronger growth to the world's sixth economy. The Brazilian economy is expected to grow a meager 1.5 percent this year after hitting a two-decade high of 7.5 percent in 2010.
Although local activity is improving, a still weak industrial sector has cast doubts over the recovery's strength. A weaker currency, coupled with record-low interest rates, is aimed at lowering costs for Brazilian industry and shielding it from foreign competition.
A depreciated real is already having a positive impact on the Brazilian economy, Mantega said on Friday, with imports falling and exports of manufactured goods starting to rise, even in an international scenario that is "totally unfavorable."
Mantega shrugged off any worries that a weaker currency could further stoke prices, saying that inflation is under control and that could allow for more expansionist monetary policy in Latin America's largest economy.
Inflation slowed in the month to mid-November, but at 5.64 percent remained well above the center of the official target range of 4.5 percent -- plus or minus two percentage points.
The central bank has acknowledged that inflation is likely to remain above the center of the target for about two years.