March 30 (Bloomberg) -- Brazilian stocks dropped, led by commodity producers, after the government cut its economic growth forecast and the U.S. said its banks may need more aid and bankruptcy may be an option for its automakers.

Cia. Vale do Rio Doce dropped the most in three weeks after HSBC Holdings Plc and Banco Santander SA downgraded the world’s biggest iron ore miner. Petroleo Brasileiro SA sank the most in a month as oil fell and Itau Corretora recommended selling the common shares. Gerdau SA led a drop in steelmakers after an Obama administration official warned that bankruptcy may be the best option for General Motors Corp. and Chrysler LLC.

“Everyone is realizing that the world is globalized and you can’t expect Brazil not to feel this slowdown,” said Julio Martins, who oversees about $123 million at Banco Prosper in Rio de Janeiro. “There is so much uncertainty so people are paying close attention to what the big global leaders are going to do and the statistics that are coming out.”

The Bovespa declined 2.8 percent to 40,756.63 at 9:47 a.m. New York time. The BM&FBovespa Small Cap index fell 1.7 percent. In Mexico, the Bolsa index slid 2 percent. Chile’s Ipsa slipped 0.6 percent.

Brazil’s central bank expects the country’s economy to expand 1.2 percent in 2009, down from a previous forecast of 3.2 percent, policy makers said today in their quarterly inflation report published on the central bank’s Web site today.

Vale fell 3.6 centavos to 26.80 reais. The iron-ore producer was cut to “hold” from “buy” at Banco Santander SA on the outlook for slower sales as global steel production remains “sluggish.” HSBC Holdings Plc lowered its rating to “neutral” from “overweight.”

Petrobras

Investors should sell common stock in Petrobras, Itau Corretora analysts said. Investors who want to continue holding shares in Petrobras should use the proceeds of the sale of common stock to buy the preferred shares, Itau said.

Petrobras’ common shares, which have gained 35 percent this year, lost 2.8 percent to 36 reais. Crude oil declined for a second day as tumbling equity markets indicated that economic activity and demand for fuel may weaken further.

An index of financial stocks in the MSCI Brazil index dropped 4.7 percent, the most in three weeks. Banco Itau Holding Financeira SA slid 2.9 percent to 25.83 reais.

Some financial institutions will need “large amounts” of government aid, U.S. Treasury Secretary Timothy Geithner said yesterday on the ABC News program “This Week.” The Treasury has about $135 billion left in a financial-stability fund, Geithner said, while declining to say whether he will need to request additional money.

Gerdau, Latin America’s biggest steelmaker, fell 4.3 percent to 12.91 reais. The Bloomberg Base Metals 3-Month Price Commodity Index slipped 1.8 percent. General Motors and Chrysler must overhaul their recovery plans with deeper concessions to justify further taxpayer aid, and bankruptcy may ultimately be their best chance, an Obama administration official said.

The Bovespa has risen 8.8 percent this year on speculation government measures, falling interest rates and a recovery in commodity prices will boost growth.

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

Last Updated: March 30, 2009 10:23 EDT