By Guillermo Parra-Bernal
SAO PAULO, July 28 (Reuters) - Spain's Banco Santander SA finds itself in an unwanted spotlight in Brazil after its local subsidiary irked the government by circulating a client note saying that the re-election of President Dilma Rousseff would likely push asset prices lower.
In a monthly column to wealthy clients entitled "You and Your Money," Banco Santander Brasil SA said a drop in Rousseff's popularity had helped spark a recent rally in the Brazilian stock market - a common view among economists and investors who believe the government's heavy-handed policies have contributed to Brazil's current economic slump.
The note then went on to say that the market rally could fizzle if the president's popularity stabilizes or rebounds in opinion polls ahead of October's election, an assertion that angered government officials and members of the ruling Workers' Party.
"The real would weaken, long-term interest rate futures would rise again and the Bovespa index would fall, reversing some of the recent gains," read the column, which was mailed with monthly statements to about 54,000 account holders.
Hours after the report was made public on a local website, the president of the leftist Workers' Party accused Santander of "electoral terrorism," sparking a media frenzy that dominated the political pages of Brazilian newspapers over the weekend.
Asked about the episode on Monday in an online interview with Brazilian media, Rousseff had harsh words for the bank. "It's unfortunate and unacceptable what Santander did," she said, adding that she plans to discuss the matter with the bank.
Santander Brasil is scrambling to contain the damage. On Friday, it issued a public apology for using language that it acknowledged could be construed as politically biased.
On Sunday, the bank's global chairman weighed in. Speaking to reporters in Rio de Janeiro, Emilio Botin said the report reflected the views of an individual analyst, not the institution. He also reiterated Santander's commitment to Brazil, a key market that accounts for a fifth of the bank's profits globally.
"We continue to invest and to encourage others to invest in Brazil," Botin said, adding that the bank would take the "necessary measures" to ensure that a similar incident does not happen again.
Santander Brasil declined to disclose whether it was conducting an internal investigation into the matter or if people were fired or could be fired over the incident.
The Santander incident sent a chill through Brazilian financial markets, prompting some analysts and economists to say they would be extra careful with their research notes to avoid controversy.
The episode highlights escalating tension around Brazil's presidential race, which now looks too close to call after two recent opinion polls showed opposition challenger Aecio Neves neck and neck with Rousseff in a second-round runoff vote.
Santander Brasil, which had 494.6 billion reais ($222 billion) in assets at the end of March, is the third-largest private-sector bank and the largest foreign lender in Brazil.
($1 = 2.22 reais) (Additional reporting by Silvio Cascione and Jeferson Ribeiro and Alonso Soto in Brasilia; Editing by Todd Benson and Cynthia Osterman)