UPDATE 3-Brazil markets stabilise as doubts over Lula's economic plans linger

(Recasts with market prices, adds Petrobras)

By Gabriel Araujo and Bernardo Caram

SAO PAULO, Jan 4 (Reuters) - Brazilian markets improved on Wednesday even as criticism of President Luiz Inacio Lula da Silva's economic policies grew, with analysts and a leading newspaper slamming ministers after markets tanked in the leftist's first two days in office.

Wednesday's improved market outlook comes as increasingly skeptical investors seek to decipher Lula's economic plans, with ministers forced to fix fences after various communication hiccups in the early days of the leftist administration.

Brazil's benchmark stock index Bovespa was up 1.1% after tumbling roughly 5% in the initial days of 2023.

The real, which has fallen by 3.8% against the dollar in the last three sessions, was flat.

Various ministers were forced on Wednesday to clarify comments they or their colleagues had made in previous days that had prompted a market sell-off.

Lula's Chief of Staff, Rui Costa, ruled out plans to revise the previous government's economic reforms, after Social Security Minister Carlos Lupi on Tuesday said they would need to review the investor-friendly pension reform approved by former President Jair Bolsonaro.

Shares in oil company Petroleo Brasileiro rose 3.7% after the company's incoming chief executive ruled out interventions in fuel prices, seeking to clarify his earlier comments that suggested the state-run firm might uncouple prices from international benchmarks. Shares in Petrobras fell roughly 10% in the first two sessions of the year.

Nonetheless, market skepticism was far from dispelled, with concerns that Lula's social spending and statist policies will lead to out-of-control spending.

Financial Minister Fernando Haddad, a former mayor of Sao Paulo who took office vowing to restore public accounts, was dubbed a "decorative minister" on Wednesday by his hometown newspaper O Estado de S. Paulo.

Markets reacted badly to Haddad's first days in office, especially after Lula ordered a budget-busting extension to a fuel tax exemption that Haddad had publicly opposed.

"Haddad learned on his first day in office that he will be a decorative figure, a sort of task worker for President Lula," the conservative daily known as "Estadao" said in an editorial, adding Haddad had been "discredited" and should learn to say "no" to Lula.

Analysts at Citi said that despite Lula and Haddad's first speeches in office being consistent with their baseline scenario, both sounded less pragmatic and fiscally responsible than initially thought.

"In general, they have given off the impression of a government that is tone deaf - at least with respect to the types of tones that financial markets want to hear," FX strategists at BMO Capital Markets told clients, adding that their comments could lead to a situation in which "inflation will reassert itself and rate cuts will be out the window."

REVERSING REFORMS?

Comments by Lula's centrist Vice President Geraldo Alckmin also raised eyebrows.

Speaking at his inauguration as minister of development, industry and trade, the pro-business Alckmin said his ministry would have state-run development bank BNDES under its wing, noting it was essential to strengthen the bank's role amid the country's search for reindustrialization.

Investors were also unnerved by comments from Labor Minister Luiz Marinho, a critic of a 2017 labor reform approved under former President Michel Temer, who said on Tuesday that the new administration would prioritize regulating working relations established through cell phone apps and digital platforms.

Analysts at Guide Investimentos said the remarks of Lula's economic team showed the government remained "in the path of reversing liberal reforms passed by the last two presidents."

($1 = 5.4797 reais)

(Reporting by Gabriel Araujo in Sao Paulo; Additional reporting by Marcela Ayres and Bernardo Caram in Brasilia; Editing by Nick Zieminski, Frank Jack Daniel and Lisa Shumaker)