* Debt heading to 3.5 times EBITDA
* Low Brazil fuel prices hurting firm
SAO PAULO Feb 9 The chief executive of Brazil's state-led oil company Petroleo Brasileiro SA warned the government about rising debt levels that may jeopardize the firm's investment grade credit rating, a Sao Paulo newspaper reported on Saturday.
Without higher fuel prices in Brazil, Petrobras' debt will rise well above its internal target, Chief Executive Maria das Graças Foster said in a meeting with Brazil's Finance Minister Guido Mantega, according to Estado de Sao Paulo newspaper.
She told him last week that debt could reach 3.5 times earnings before interest, taxes, depreciation and amortization, or EBITDA, by the fourth quarter of this year, according to an anonymous source cited by the paper.
Petrobras did not immediately respond to phone calls and an emailed request for confirmation.
The firm's debt has already risen to 2.77 times EBITDA, above its internal limit of 2.5 times core profit. Moody's Investors service put Petrobras debt on watch for a possible downgrade on Dec. 18.
A credit rating below investment grade would oblige international funds to abandon Petrobras when Graças Foster has promised to find savings of more than $15 billion to prevent a $237 billion five-year investment plan from ballooning.
Petrobras cash generation has been squeezed in recent years as the government, which owns a majority of voting shares, prevented the company from raising fuel prices in line with world prices. The government has held prices in check to help limit inflation.
Finance Minister Mantega, who is also chairman of the Petrobras board, ruled out higher fuel prices for the time being since the government raised prices on Jan. 30. (Reporting by Caroline Stauffer; Editing by Vicki Allen)