June 3 (Bloomberg) -- Brazilian stocks fell to the lowest in three weeks, led by homebuilders and retailers, after a bigger- than-expected jump in industrial output raised speculation the central bank may keep raising interest rates to cool the economy.

Gafisa SA, the second-biggest homebuilder, paced a decline for interest-rate sensitive stocks after Banco Santander SA recommended investors sell the shares. Vivo Participacoes SA, the largest mobile-phone carrier, slid the most in the Bovespa after analysts said the government may force mobile companies to cut the rates they charge for use of their networks, reducing profit.

``It's clear that we have to see more investment coming in before you have less of an inflation impact and one way of doing that is raising interest rates,'' said Roberto Lampl, who helps manage $4 billion at ING Investment in the Hague. ``We've been cautious on the more consumer discretionary names because of their sensitivity to interest rates.''

The Bovespa index of most-traded shares on the Sao Paulo exchange fell 1,280.85, or 1.8 percent, to 70,616.40 at 11:42 a.m. New York time. Mexico's Bolsa lost less than 0.1 percent, while Chile's Ipsa rose 0.6 percent.

Gafisa fell 4.8 percent to 33.52 reais. Brazil's second- biggest homebuilder was cut to ``underperform'' from ``hold'' by Santander analysts including Marcello Milman, as rising rates mean ``the balance of risks for homebuilders has increased.''

Cyrela Brazil Realty SA Empreendimentos e Participacoes, Brazil's biggest builder, fell 2.5 percent to 25.15 reais after Santander cut the stock to ``hold'' from ``buy.''

Lojas Renner SA, Brazil's second-biggest retailer, dropped 3.5 percent to 38.59 reais. Natura Cosmeticos SA, the largest cosmetics company, slid 3 percent to 17.80 reais.

Rate Increase

Brazil's industrial output jumped 10.1 percent in April, up from a revised 1.5 percent increase in March, the government said today. The expansion was faster than the median forecast of 9.6 percent in a Bloomberg survey of 28 economists.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co., said the central bank may raise rates by three quarters of a percentage point, higher than estimates.

Policy makers tomorrow are expected to raise the overnight rate by a half-point to 12.25 percent, according to the median forecast in a Bloomberg survey of 37 economists. The central bank will announce its rate decision after 5 p.m. New York time.

Vivo fell 6.8 percent to 10.22 reais after UBS AG cut its rating on the stock to ``neutral'' from ``buy.'' According to a UBS interview with Helio Costa, Brazil's telecommunications minister, the regulator is studying a ``more immediate cut in mobile termination rates.'' Tim Participacoes SA, the second- biggest mobile-phone carrier, lost 2.5 percent to 4.65 reais.

JBS Drops

JBS SA dropped 3.1 percent to 9.40 reais. The world's biggest beef producer is awaiting approval to buy Smithfield Beef Group Inc. and National Beef Packing Co., Valor Economico reported. Ranchers led by R-CALF USA, which represents more than 12,000 cattle farmers, oppose the transaction because it also would give JBS control of the biggest U.S. feedlot operation, allowing the Brazilian company to raise its own livestock when prices are too high, Valor reported.

In Mexico, most stocks rose, led by restaurant operator Alsea SAB, which gained after it announced it opened its first Starbucks franchise in Argentina.

Alsea, which operates Domino's Pizza stores in Mexico and Brazil, rose to the highest in four weeks after saying it seeks in Argentina to duplicate the success it has had in Mexico with Starbucks franchises. Alsea advanced 2 percent to 13.57 pesos.

Soc. Quimica y Minera de Chile SA led gains in Chile after a rival fertilizer producer boosted its earnings forecast because of higher prices. SQM rose 4.5 percent to a record 18,200 pesos.

In other Latin American markets, Argentina's Merval gained 0.3 percent, Peru's Lima General rose 0.4 percent and Colombia's IGBC fell 0.9 percent.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net;

Last Updated: June 3, 2008 11:50 EDT