UPDATE 1-Brazil axes a foreign investment tax;currency dives

(Adds currency move, details)

SAO PAULO, Oct 23 (Reuters) - Brazil eliminated on Thursday a key tax that foreigners pay on financial market transactions, the government's latest step to halt the currency's steep slide and ease a credit crunch caused by the global financial crisis.

Despite the fresh steps, Brazil's real (BRBY) plunged nearly 6 percent in morning trade to brush three-year lows as a worsening global economic outlook and stock market falls continued to lure investors to the safety of dollars.

The Finance Ministry said it had eliminated a tax known as the IOF, which was 1.5 percent on currency exchange for inflows of foreign capital and 0.38 percent percent on foreign currency loans.

The new steps came a day after Brazil allowed its two largest state banks to buy stakes in financial firms, some of which it says could be facing difficulties from the drying up of credit in domestic markets.

The country's policy makers have rushed in recent weeks to provide liquidity to banks and financial markets.

Official steps have ranged from foreign-exchange swap auctions to increasing credit lines to farm and construction industries to allowing bigger banks to take over the loan portfolios of smaller banks in potential distress.

The real was down 5.7 percent at 2.524 on Thursday, around three-year lows. The currency has lost about a quarter of its value against the dollar this month.

(Reporting by Renato Andrade; Writing by Stuart Grudgings, Editing by Walker Simon)