UPDATE 3-Banco do Brasil bulks up with Votorantim purchase

*Banco do Brasil to pay 4.2 bln reais for stake

*Combined firm to have 553.3 bln reais in assets

*Banco do Brasil shares, Votorantim bonds rally (Adds Votorantim bonds, automobile lending, comments)

By Elzio Barreto

SAO PAULO, Jan 9 (Reuters) - State-owned Banco do Brasil agreed on Friday to pay 4.2 billion reais ($1.84 billion) for a 50 percent stake in Banco Votorantim, to compete with private-sector firms amid a wave of consolidation in the Brazilian banking sector.

The combined firm would have 553.3 billion reais in total assets and a credit portfolio of 232.8 billion reais, Banco do Brasil said.

The deal comes after months of intense activity in Brazil's financial sector, with local banks like Itau, Unibanco and Bradesco taking advantage of looser central bank regulations to snap up loan portfolios from smaller companies squeezed by the global credit crunch.

It also comes on the heels of consolidations in Europe and the United States as banks bulk up to better handle the financial crisis.

"The acquisition helps to strengthen Brazil's financial system," Finance Minister Guido Mantega said in a news conference in Brasilia, flanked by the CEOs of Banco do Brasil and Votorantim. "We see the importance to the Brazilian economy of having strong banks, given this crisis."

Shares of Banco do Brasil and Votorantim bonds rallied after the purchase was announced.

Banco do Brasil (BBAS3.SA) jumped 3.6 percent, compared with a 0.8 percent drop in the benchmark Bovespa index .BVSP. Votorantim's 6-7/8 coupon bonds due October 2015 XS0232141134=R jumped 8 points to 105 bid, sending the yield lower to 5.961 percent, according to Reuters prices.

Banco do Brasil said the takeover would quadruple its portfolio of automobile loans, putting it closer to rivals such as Spain's Santander (SAN.MC) and Brazilian banks Itau (ITAU4.SA) and Bradesco (BBDC4.SA).

"We didn't have a very large presence in the automobile segment. The (credit) portfolio is more balanced now," Banco do Brasil Chief Executive Antonio Francisco de Lima Neto said at the news conference.

Banco do Brasil, Latin America's largest bank by assets, announced in July a joint venture with South African financial group FirstRand (FSRJ.J) to provide vehicle financing in Brazil, but the plans collapsed in December.

Votorantim's financing unit, called BV Financeira, has a presence in 18,000 car dealerships and between 2,000 and 3,000 home improvement stores, giving Banco do Brasil faster access to consumers than by starting from scratch with FirstRand.

"The risks associated with this business are much lower," Lima Neto said.