July 1 (Bloomberg) -- Brazil's Bovespa stock index fell to the lowest in 10 weeks after industrial output rose less than economists' forecast, bolstering concern that record oil prices may be slowing the economy while stoking inflation.

Duratex SA led industrial stocks lower after the government said output rose 2.4 percent in May, less than the 4.2 percent median forecast. Gafisa SA and Lojas Americanas paced declines in homebuilders and retailers on concern higher fuel and food prices will spur inflation, forcing policy makers to raise borrowing costs. TAM SA, the biggest airline, and Braskem SA, Latin America's largest petrochemical company, fell amid speculation record oil prices will boost their costs.

Industrial output ``was quite below expectations,'' said Guilherme Sand, who helps manage the equivalent of $330 million at Solidus Brokerage in Porto Alegre. ``The biggest worry around the world is inflation and if that will make interest rates rise globally.''

The Bovespa index of most-traded shares on the Sao Paulo exchange dropped 1,927.87, or 3 percent, to 63,089.71 at 1:50 p.m. New York time, the lowest since April 15. All but six stocks on the 66-member index fell. Chile's Ipsa fell 2.2 percent, the most in four months, and Mexico's Bolsa slid 1.4 percent.

Duratex, a maker of bathroom and wood products, dropped 6.2 percent to 31.90 reais.

After stripping out seasonal factors, output fell 0.5 percent in May from April, the national statistics agency said in a statement distributed in Rio de Janeiro.

Gafisa slid 5.7 percent to 26.09 reais. Lojas Americanas fell 5 percent to 9.98 reais after JPMorgan Chase & Co. analyst Andrea Teixeira said Brazil's biggest discount retailer will be among those ``most negatively affected'' by rising Brazilian interest rates.

Inflation

Brazil's inflation rate rose to the highest in more than two years last month. The central bank has raised interest rates twice since April, to 12.25 percent from a record-low 11.25, in a bid to cool inflation that has been running above the government's 4.5 percent target since January.

Brazilian voters expect inflation will accelerate during the next six months by the biggest margin since at least March 2004, Sao Paulo-based pollster Ibope said yesterday.

Tam tumbled 8.8 percent to 27.64 reais. Oil prices rose 1.7 percent to $142.36 a barrel, extending this year's 48 percent gain, as the International Energy Agency said supplies may not keep up with demand through 2013 and ABC News reported Israel is increasingly likely to attack Iran this year. Fuel prices account for 40 percent of TAM's costs.

Gol Linhas Aereas Inteligentes SA, the second-biggest airline, fell for a fourth day, dropping 6.4 percent to 16.77 reais. Braskem, whose main cost is petroleum products, slid 3.7 percent.

Gainers

Sao Martinho SA rose 0.4 percent to 26 reais. Brazil's second-biggest sugar and ethanol producer by market value reported ``better than expected'' fiscal fourth-quarter earnings, Unibanco analyst Marcos Severine wrote in a note to clients. Cosan SA Industria e Comercio, Brazil's biggest ethanol producer, gained 1.8 percent.

Chile's Ipsa index fell to the lowest in six weeks, paced by retailer Ripley Corp., as a global equity rout added to concerns that the domestic economy and consumption is slowing.

Ripley, a department store operator, dropped 5.4 percent to 383 pesos, the lowest since trading began in July 2005.

The Dow Jones Industrial Average extended its slump from an October record to more than 20 percent, entering a so-called ``bear'' market. Higher energy costs are also slowing economic growth and fueling inflation in Chile. Industrial output in the country declined 2.4 percent in May from a year earlier, a government agency reported yesterday.

``The industrial production number fell so a drop in economic growth is expected,'' Hugo Avendano, an analyst at Banchile Inversiones, said by phone from Santiago today. ``All that makes the market respond in this way.''

In Mexico, Grupo Financiero Banorte SAB, Mexico's largest publicly traded lender, fell the most in three weeks after Banco UBS Pactual said the bank may post trading losses.

Banorte slipped 3 percent to 47 pesos.

The main indexes in Argentina, Colombia and Peru all declined.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; James Attwood in Santiago at jattwood3@bloomberg.net

Last Updated: July 1, 2008 14:16 EDT