Sept. 8 (Bloomberg) -- Brazilian stocks rallied the most in five weeks as commodity prices surged and analysts predicted that the country’s economic contraction will be smaller than previously estimated.

Petroleo Brasileiro SA, the state-controlled oil company, added 1.1 percent as crude rose above $71 a barrel. Banco do Brasil SA led gains for lenders as economists predicted a 0.16 percent contraction this year, almost half last week’s estimate. Bradespar SA, a controlling shareholder of miner Vale SA, rose the most in almost two months after a newspaper reported billionaire Eike Batista is in talks to buy the company.

The Bovespa gained 2.1 percent to 57,854.80, the highest level since July 31. More than 10 stocks rose on the index for each that fell. The measure has rallied 54 percent this year on speculation record-low interest rates and rising prices for Brazil’s commodity exports will fuel a rebound in the economy.

“It would be hard to rally like we did in the first half of the year, but the trend is for more gains and positive inflows,” said Frederico Sampaio, who helps manage 660 million reais ($361 million) in Brazilian stocks for Franklin Templeton Investimentos Brasil in Sao Paulo. “Rates around the world are very low so there’s a big appetite to buy.”

The BM&FBovespa Small Cap index jumped 2.5 percent to 931.42 today. Mexico’s Bolsa index added 2.1 percent, while Chile’s Ipsa increased 0.2 percent.

Latin American shares joined a rally for developing- nation stocks as speculation mounted China, the biggest consumer of metals, will take extra steps to support equities. The MSCI Emerging Markets Index advanced 1.9 percent to a one-year high.

Petrobras, Vale

Petrobras rose 37 centavos to 32.88 reais. Crude oil rose above $71 a barrel after the dollar declined, spurring demand for commodities, and as OPEC ministers gathered in Vienna to decide on output levels.

Banco do Brasil, Latin America’s biggest bank by assets, added 1.7 percent to 26.99 reais. Itau Unibanco Holding SA, Brazil’s largest non-government lender, increased 1.3 percent to 32 reais.

Economists’ forecast for Brazil’s 0.16 percent economic contraction compares with last week’s projection for a 0.3 percent decline this year, according to the median forecast in a central bank survey of about 100 economists published today.

Brazilian homebuilders rallied after Goldman Sachs Group Inc. boosted the companies’ share-price estimates on the prospect of rebounding housing demand.

Goldman Sachs

Goldman Sachs increased its stock-price estimates for Gafisa SA, Cyrela Brazil Realty SA Empreendimentos e Participacoes and Rossi Residencial SA by 55 percent, 45 percent and 44 percent, respectively. Gafisa, Brazil’s second-biggest homebuilder, jumped 5.1 percent to 27.90 reais. Cyrela, the largest, added 3 percent to 23.27 reais. Rossi rose 3.8 percent to 12.43 reais.

Vale, the world’s biggest iron ore miner, gained 2.3 percent as Goldman Sachs raised its forecasts for most industrial metals on a recovery in the world economy.

“Investor expectations about continued future economic growth will support prices across base metals as spare capacity gradually disappears and the cost of production steadily climbs,” Goldman Sachs analysts wrote in a report.

Vale added 75 centavos to 33.79 reais. The Bloomberg Base Metals 3-Month Price Commodity Index advanced 2 percent.

Bradespar Gains

Bradespar, Vale’s biggest shareholder, jumped 6 percent to 30.90 reais. An acquisition of Bradespar may surpass 9 billion reais, including the offer Batista would have to make for the stake of minority shareholders, Folha de S. Paulo newspaper reported on Sept. 5, without saying where it got the information. The billionaire wasn’t able to get the support of Vale Chief Executive Officer Roger Agnelli, Folha said.

A Bradespar spokeswoman in Sao Paulo said the company doesn’t comment on speculation. A spokeswoman for Batista in Rio de Janeiro didn’t return a call seeking comment.

LLX Logistica SA rose 4.8 percent to 5.88 reais. The shipping company spun off from Batista’s iron-ore mining company MMX Mineracao e Metalicos SA last year may be taken over by Vale should Batista acquire control of Bradespar, Itau analyst Victor Mizusaki wrote in a note. MMX gained 7.8 percent to 9.78 reais.

Empresa Brasileira de Aeronautica SA, the world’s fourth- largest airplane maker, jumped 3 percent. French President Nicolas Sarkozy said the country plans to replace its Lockheed C-130 Hercules planes with jets from Embraer.

Mexico Stocks

The Bolsa index rose to the highest level since July 2008.

Investors are buying stocks that have fallen since last month after regulators relieved Mexico’s private pension funds, known as Afores, from having to buy shares of companies that rarely trade, according to Sergio Zermeno, the head of Santander’s trading desk in Mexico City.

“Companies with good capitalization but not much liquidity had fallen as much as 20 percent,” he said. “Easing around the world has created excess liquidity, so investors are picking up shares rather cheaply.”

Axtel SAB, Mexico’s second-largest fixed-line phone operator, climbed 3.6 percent after a person familiar with the deal says it plans to sell 10-year dollar bonds in overseas markets to repay debt, including global notes due in 2013.

America Movil SAB rose 3.3 percent to 30.92 pesos after Barclays Plc said the company has better prospects than its rivals in the region and started coverage of the shares today with an “overweight” rating and a $60 price forecast. Telmex Internacional SAB, which also was rated “overweight” by Barclays, jumped 6.4 percent to 9.03 pesos.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Emily Schmall in Mexico City at eschmall@bloomberg.net.

Last Updated: September 8, 2009 17:00 EDT