CORRECTED-UPDATE 1-Venezuela to lower VAT to fight inflation

(Corrects in second paragraph to show VAT will drop to 9 percent, and not 9.5 percent)

CARACAS, Feb 15 (Reuters) - President Hugo Chavez vowed on Thursday to slash Venezuela's value added tax to combat the highest inflation in Latin America despite price controls that have caused meat and sugar shortages in supermarkets.

Chavez said he will lower VAT by 5 percentage points to 9 percent by July in a measure that each year will cost the government up to 8 trillion bolivars ($3.7 billion) in income but also reduce inflation by 3 percentage points.

He has faced opposition and media criticism for last year's inflation of 17 percent and has struggled to keep food costs down despite controls that have caused distortions in supply chains and occasionally left store shelves empty.

The former soldier, who is on a nationalization drive this year, reiterated a threat that he will seize businesses that his government believes are price gouging or hoarding food.

Speaking on his television talk show "Hello President," Chavez instructed his supporters and the military to be vigilant to detect such "speculators."

The government's official goal has been to keep inflation down to 12 percent this year.

Chavez said VAT will first be reduced on March 1 by 3 percentage points and then by a further 2 points on July 1.

To compensate for the income loss, Chavez, a proud socialist, said the government will create new taxes, including one that could involve the private property of the rich.

The anti-U.S. president has vowed to use the mandate from his landslide reelection in December to turn the OPEC nation into a socialist state.