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UPDATE 2-Brazil's Lula unveils $878 bln investment plan

*Spending blitz strengthens Rousseff’s candidacy

*Lula says remains mindful of inflation risks

*Infrastructure spending key for World Cup, Olympics

(Adds quotes, details)

By Isabel Versiani and Fernando Exman

BRASILIA, March 29 (Reuters) - President Luiz Inacio Lula da Silva launched a $878 billion program to upgrade Brazil’s infrastructure on Monday, setting out a major campaign banner for his chosen candidate in October elections.

Days before Lula’s chief of staff, Dilma Rousseff, must step down to be able to campaign for president, the government said the program would spend 1.59 trillion reais ($878 billion) on infrastructure in the coming years, with 959 billion reais ($530 billion) earmarked for between 2011 and 2014.

Rousseff said the program would improve the lives of millions of Brazilians and reduce inequality by improving access to clean water, medical posts and energy as well as modernizing the country’s air, road and rail system.

“We crossed the desert of stagnation and Brazil has resumed the path of development,” Rousseff said in a speech in the capital Brasilia to launch the new package, her last major public event before leaving office. “But Lula’s government, our government ... does not accept a path that doesn’t have development with redistribution of income.”

The hugely popular Lula, who cannot run for a third term, has anointed Rousseff the “Mother of the PAC,” the acronym of the flagship infrastructure program, making clear he sees it as a key campaign strength for her.

The former union leader sought to allay concerns that the package signals a loosening of government spending discipline in an election year even as figures show inflation expectations rising sharply in recent months.

“We will do all this without losing sight of the need to take care with fiscal responsibility and inflation,” he said. “An election year is time for us to think of the next generation.”

Rousseff is expected to tout the massive investments to voters as evidence that Lula’s center-left government is rapidly improving the pot-holed roads, clogged ports and underfunded health system that dog Latin America’s biggest economy despite strong growth in recent years.

DELAYS

The centrist opposition, whose presidential candidate is expected to be Sao Paulo state Governor Jose Serra, has criticized the program as propaganda, pointing to lengthy delays in projects in its first phase, which began in 2007 and totaled about $300 billion in investments.

Government figures show that only about half of the nearly 2,500 projects mandated under the first phase of the program have been completed.

Rousseff is trailing Serra in opinion polls, but has recently narrowed the gap and is seen by many analysts as the favorite because she will benefit from Brazil’s rebounding economy and the support of the charismatic Lula.

By 2014, the new phase of the plan will spend an estimated 278 billion reais ($154 billion) on the “My House, My Life” government program to provide low-income families with 2 million new homes, while 104.5 billion ($57.7 billion) will go to upgrading the often decrepit transport system.

The country’s energy sector will receive 465.5 billion reais ($257 billion). The plan also calls for more than 2,800 new community police posts, nearly 8,700 basic health posts and 6,000 preschools to be set up in towns throughout the vast country.

As well as making Brazilians’ lives harder, transport and other infrastructure bottlenecks prevent the country from achieving more lofty economic growth rates comparable to fellow emerging giants like India and China.

Brazil’s ability to successfully host the world’s biggest sporting events -- the soccer World Cup in 2014 and the Olympic Games in 2016 -- will also depend on ramping up spending on transport and stadiums.

($=1.81 reais)

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