(Recasts to add details on borrowing costs, earmarked loans)
By Silvio Cascione and Luciana Otoni
BRASILIA, March 26 (Reuters) - Lending growth in Brazil accelerated in February from the previous month despite higher interest rates, driven up by a sharp increase in government-mandated loans aimed at encouraging housing and business investments.
Outstanding loans in Brazil's banking system rose 0.6 percent in February from the prior month, the central bank said in a report on Wednesday.
The so-called earmarked loans, or credit aimed at investments and homebuilding in accordance with government mandates, jumped 1.2 percent from January. Non-earmarked loans increased only 0.1 percent.
President Dilma Rousseff has used state banks to push down Brazil's credit costs, among the world's highest for a major economy, while fostering competition with private banks. Outstanding loans by state-controlled banks rose 0.8 percent in February from January and 22.7 percent from a year earlier, while loans by local private-sector banks increased 0.6 percent from January and 6.5 percent from February of last year.
As a result, loans from state banks represented 51.8 percent of outstanding loans in Brazil in February, compared with 51.6 percent in January and 48.4 percent a year earlier. The share of local private-sector banks fell to 33.1 percent from 35.6 percent a year earlier.
The average cost of borrowing for non-earmarked loans in the banking system, a gauge of how much Brazilians pay in interest for a loan, rose to 31.5 percent, the highest since March 2012, according to the report.
The spread - or the difference between the rate at which banks lend money and that at which they pay for deposits, widened to 19.7 percentage points - the widest since July 2012.
Borrowing costs rose as the central bank raised the benchmark overnight Selic lending rate eight times in the past year to head off inflation. Spreads are probably widening less dramatically because of competition between private and public sector banks, analysts said.
Loans in arrears for 90 days or more, the industry's benchmark gauge for credit delinquencies, remained unchanged from January at 4.8 percent, the report said.
Loans made by all banks in Brazil totaled a record 2.733 trillion reais ($1.183 trillion) last month, the report showed.
$1 = 2.3109 Brazilian reais Reporting by Luciana Otoni; Writing by Silvio Cascione and Chizu Nomiyama