Jan. 20 (Bloomberg) -- Brazilian stocks dropped the most in a week, wiping out this year’s gains, as materials companies and banks slid on concern a global economic slowdown is worsening.

Cia. Vale do Rio Doce fell more than 4 percent as the country’s industries slowed production and metal prices fell. Banco do Brasil SA led declines among lenders on speculation President Luiz Inacio Lula da Silva will pressure banks to reduce the interest rate they charge customers. Aracruz Celulose SA slumped the most in almost three months on concern terms of a takeover offer were unfavorable.

“We continue to see negative sentiment about this slowdown in economic growth,” said Patricia Branco, who helps manage $630 million at Global Equity Administradora de Recursos in Rio de Janeiro. “Oil keeps falling, agricultural and metal commodities keep dropping and so it’s hard to see the Bovespa gaining.”

The Bovespa dropped 4 percent to 37,272.07. Mexico’s Bolsa slumped 5.8 percent, while Chile’s Ipsa lost 0.8 percent. The MSCI Emerging Markets index fell 3.1 percent.

The Bovespa, which began the year with its best start since 1992, has tumbled 12 percent since Jan. 6 on growing speculation Latin America’s largest economy is headed for a recession. A government report yesterday showed the biggest monthly job loss on record in December.

Metals Fall

Vale, the world’s biggest iron-ore producer, dropped 1.09 real to 25.30 reais. Usinas Siderurgicas de Minas Gerais SA, the largest provider of steel to Brazil’s auto industry, lost 4.9 percent to 28.30 reais. The Bloomberg Base Metals 3-Month Price Commodity Index slid 2.6 percent.

Brazilian manufacturers reduced their use of installed capacity to 81.6 percent in November, the National Industrial Confederation said today. Capacity utilization fell from a revised 82.6 percent in October.

Banco do Brasil declined 6.9 percent to 13.45 reais.

A spokeswoman for the president’s office said Lula plans to meet tomorrow with representatives of government-controlled lenders to ask for measures to lower the rates on loans. Reducing rates would lower banks’ profits, said Renato Bandeira de Mello, operations manager at Futura Corretora in Sao Paulo.

Banco Itau Holding Financeira SA, Latin America’s biggest bank by assets, fell 6.8 percent to 22.64 reais. Banco Bradesco SA declined 5.3 percent to 20.11 reais.

Aracruz Takeover

Aracruz tumbled 11 percent to 2.35 reais. The world’s biggest eucalyptus pulp maker agreed to a 2.71 billion reais ($1.16 billion) bailout by competitor Votorantim Celulose & Papel SA and reached a deal with banks to restructure $2.63 billion of debt.

Votorantim will buy 127.5 million Aracruz voting shares, doubling its stake to 56 percent, the company said today in a statement. The plan, first announced in September, earlier derailed as both companies posted their first quarterly losses in six years because of wrong-way currency bets.

“Investors are mainly looking at the share swap,” Juan Pablo Leon, who covers Aracruz at Wac Research in Santiago, Chile, said in a telephone interview today. “It’s quite a bit less favorable for Aracruz than negotiations in September.”

Lojas Renner SA dropped 5.8 percent to 15.83 reais. Brazil’s biggest publicly traded clothing retailer said yesterday it will pay out dividends equal to 25 percent of profit, a reduction from its usual payout of 75 percent, Goldman Sachs Group analyst Daniela Bretthauer wrote in a note.

Mexico Stocks

Mexico’s Bolsa fell the most in three months, led by materials producers and banks on concern the slowing economy and falling peso will hurt earnings.

Cemex SAB, the largest cement producer in the Americas, dropped the most in five weeks on speculation a construction slump in the U.S. and Europe will hurt profit. The Mexican peso’s 30 percent decline against the dollar since August has caused profits to decline in dollar terms.

The peso fell 1.1 percent today to 14.0285 per dollar.

Grupo Financiero Banorte SAB, Mexico’s biggest publicly traded bank, fell to the lowest in two months after UBS AG reduced profit estimates for 2008 through 2010, citing a slowing economy and falling interest rates.

“People are taking note of the poor results that companies are going to report,” said Rodolfo Navarrete, head of research at Vector Casa de Bolsa in Mexico City.

Cemex fell 12 percent to 11.82 pesos, the biggest drop since Dec. 11. Banorte declined 7.8 percent to 19.78 pesos.

Argentina’s Merval dropped 5.8 percent, Colombia’s IGBC fell 1 percent and Peru’s Lima General index retreated 1.3 percent.

To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net. William Freebairn in Mexico City at wfreebairn@bloomberg.net.

Last Updated: January 20, 2009 17:30 EST