* Govt wants ethanol to account for 50-55 pct gasoline mkt
* Govt to direct funds to sector through 2015
* Financing intended to stimulate private sector investment
* Experts say fundamental problems for sector remain (Adds impact on sugar production, FACTBOX, background)
By Peter Murphy and Reese Ewing
SAO PAULO, Feb 24 (Reuters) - Brazil's government announced an aggressive plan on Friday to raise flagging ethanol output over the next four years by showering the sector with 65 billion reais ($38 billion) in subsidized credit.
The government will allocate funds via banks to mills and independent growers for the expansion and replanting of older cane whose yields have fallen. Credit will also be available to build up ethanol stockpiles.
If mills and producers tap into the credit lines for planting cane, it could also stimulate sugar production, traders say, despite the government's efforts to direct the financing strictly to benefit ethanol output.
Some in the industry praised the government's extended commitment to backing the sector but were sceptical that financing alone would correct more fundamental problems that have limited investments in production in past years.
Brazil is the world's No. 1 sugarcane producer and is a biofuel pioneer, having turned cane-derived ethanol into a mainstream automotive fuel in the 1970s and increasing its popularity through flex-fuel technology in the last decade.
High prices for ethanol turned many drivers away from ethanol back to gasoline after a disappointing cane harvest last year that alarmed the government and prompted it to step in and fan the flames of a sector that might otherwise face decline.
"The government plan ... will meet growing national demand and the potential of the foreign market for ethanol," the agriculture ministry said in a statement.
Gerardo Fontelles, the secretary of production and agroenergy at the agriculture ministry, said in a statement that the government wants to stimulate private sector investments in the production of ethanol, which have largely dried up over the past few years due to uncertainty in local market conditions.
The government's policy of keeping gasoline prices cheap compared with rising international oil prices has made the production of hydrous ethanol unprofitable. Hydrous ethanol is used by Brazil's flex-fuel car fleet when it is sufficiently cheap compared with the price of gasoline at the pump.
The cost of production has risen in recent years, causing prices of the biofuel to rise at the pump and prompting Brazilian motorists to switch to gasoline. Gasoline is currently a better buy than ethanol in almost all parts of Brazil.
Brazil's sugar and ethanol industry has a turnover of about $48 billion annually, with about $15 billion of that from exports, mainly of sugar. The sector hopes to double that figure by 2020 and is lobbying the government to end caps on gasoline prices to enhance that effort.
The ministry unveiled a target of expanding planted area by 5.2 million hectares (12.8 million acres), more than half of the 8.4 million hectares of area currently planted with the crop.
It would make available 8.5 billion reais to eliminate the idle crushing capacity of roughly 120 million tonnes of cane that mills in Brazil now have due to the drop in cane output.
In anticipation of growing demand for ethanol from the expansion of the country's flex-fuel car fleet, the government will direct 23 billion reais to the planting of new areas.
"It's an ambitious idea on the face of it. But in terms of (loan) negotiations, interest rates and financing conditions, will it reach the producer?" asked one Sao Paulo-based ethanol trader at a multinational company.
He declined to be named as he was not authorized to speak on behalf of the company. The trader said fresh memories of the 2008/09 credit crisis, which crippled some mills, could leave producers "on a back foot" and cautious about leveraging.
He said the plan would weigh on the sugar and ethanol market if the plan was executed as quickly as the government planned.
A representative of Brazil's cane industry association Unica said it had no immediate reaction to the government's financing plan, adding that it was little more than an extension of existing credit programs for 2012/13 that were directed at expansion, replanting and ethanol stocking.
The plan foresees another 29 billion reais through 2015 for replanting of aging cane to reverse the recent drop in yields.
A further 4.5 billion reais will go to ethanol stockpile building to smooth out prices of the biofuel which can collapse during harvest and rocket in the interharvest.
"If it does boost planting, it could take some wind out of sugar prices going forward," a manager at a large multinational sugar trader said. "The government may want to finance only ethanol but it would boost the production of sugar too."
These funds include the recently announced subsidized government financing of more than 10 billion reais directed for these purposes in the sector for 2012.
With the 30 percent drop in hydrous ethanol output from the past center-south cane crop and the strong real against the dollar, exports of the biofuel have fallen sharply and Brazil even began importing large quantities of U.S. corn-based ethanol in the past year.
"Who exactly is going to sign on to a bunch of new debt to produce more ethanol if they are still facing a loss producing ethanol," said Kory Melby, an agricultural sector consultant based in Goiania, referring to the current government pricing policies that have distorted the local fuels markets. (Additional reporting by Roberto Samora and Fabiola Gomes in São Paulo; Editing by Todd Benson, Marguerita Choy, Lisa Shumaker and Jim Marshall)