Brazil's stocks, real tumble on capital inflow tax

(Updates to early afternoon)

SAO PAULO, Oct 20 (Reuters) - Brazil's stock market headed for its worst one-day plunge in three months and the national currency sank on Tuesday after the government imposed a tax on foreign investments in local stocks and bonds.

The Bovespa index .BVSP of the Sao Paulo stock exchange dropped 2.47 percent to 65,585.51, after closing at its strongest level since June 2008 the previous session. The decline in the index would be the biggest since it lost 2.5 percent on Aug. 17.

Finance Minister Guido Mantega said on Monday the government would charge a 2 percent financial transactions tax on foreign investments in Brazilian stocks and fixed-income securities in a bid to prevent the country's currency from strengthening further. The tax took effect on Tuesday.

The levy may prompt investors to shun trading of Brazilian stocks at the Sao Paulo stock exchange for American Depositary Receipts of the companies traded in New York because of the higher costs, traders said.

"This measure has more of a potential of making overseas investors migrate to the ADRs in New York because they won't have to pay taxes there," said Luiz Roberto Monteiro, an investment analyst at the Souza Barros brokerage in Sao Paulo.

Shares in BM&FBovespa (BVMF3.SA), which operates Brazil's stock and derivatives exchanges, slumped 8.9 percent to 12.34 reais on concerns of reduced trading from overseas investors because of the tax. Credit Suisse said in a report on Tuesday the tax was negative for BM&FBovespa and should hurt so-called algorithmic and high-frequency trading very much.

Petrobras and Vale, the two most-widely traded stocks in Brazil, slumped as investors dumped liquid shares. Petrobras (PETR4.SA) was down 1.5 percent to 36.79 reais, also hurt by a 1.2 percent decline in crude oil prices in New York CLc1, while mining giant Vale (VALE5.SA) fell 1.5 percent to 40.77 reais.

Steelmaker Usiminas (USIM5.SA) fell 2.5 percent to 52.83 reais. The company should report on Wednesday a 57 percent plunge in third-quarter profit from a year ago because of lower sales volumes. [ID:nN20430586]

Brazil's currency, the real (BRBY), tumbled 1.8 percent to 1.743 per dollar as traders fretted about the effects of the tax on short-term dollar inflows.

Analysts said the real, one of the world's best-performing currencies against the dollar this year, will show resilience against the measures as investors shun the dollar globally. The government is concerned that "excessive" gains in the real may dent the competitiveness of Brazilian goods overseas, thwarting an incipient economic recovery.

"I think the impact is more in the short-term," said Marco Antonio Azevedo, currency trader at Brascan Gestao de Ativos. "In the long-term, the internal fundamentals continue to prevail and the real continues to strengthen."

Brazil's real has rallied about 34 percent so far this year against the dollar. The government has repeatedly said it was worried about the strength of the local currency, which was making exports expensive. (Reporting by Ana Nicolaci da Costa and Aluisio Alves; Writing by Elzio Barreto, Editing by Chizu Nomiyama)