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By Alonso Soto and Luciana Otoni
BRASILIA, Oct 31 (Reuters) - Brazil posted its biggest monthly deficit ever in September, underscoring a rapid deterioration of the fiscal accounts that poses the biggest challenge to newly re-elected President Dilma Rousseff's efforts to regain investor trust.
For September, the government posted a primary deficit of 25.491 billion reais ($10.39 billion), its fifth straight monthly gap, it said on Friday. That put Brazil at risk of ending 2014 with its first annual primary deficit in nearly two decades.
The numbers reveal a deterioration in the government's accounts that is worse than markets had feared and will make Rousseff's task harder as she tries to convince investors she will change her policies and put Brazil's fiscal house in order.
After repeatedly denying the need to review Brazil's fiscal targets, Treasury chief Arno Augustin acknowledged on Friday the government will have to lower its primary surplus target of 99 billion reais, an amount equivalent to 1.9 percent of gross domestic product. He said the new target for this year will hinge on expectations for the intake of taxes in coming months.
The primary surplus, or excess of revenue over expenditure before debt payments, is closely watched by markets and serves as a gauge of the country's capacity to repay its loans.
A sharp deterioration of Brazil's finances under Rousseff has put the once-booming economy in the sights of rating agencies and eroded investor confidence in the country.
To appease investors and avoid a credit downgrade the administration plans steep budget cuts next year and measures to reduce public expenditures in the future, government officials told Reuters on Thursday.
The government is also considering lowering its 2015 primary surplus target to something more credible to improve transparency, officials said.
Since taking office in 2011, Rousseff has spent heavily on subsidies and cut taxes for dozens of sectors in a bid to shore up the struggling economy.
The efforts did not fire up activity. Instead, they eroded Brazil's finances and raised the concerns of investors that not long ago hailed the country as an emerging market star.
Although most analysts agree that Brazil does not face an imminent budget crisis, the weakening public accounts have raised fears about the future health of its finances.
"Ensuring fiscal sustainability will be the first big challenge facing the Brazilian government in 2015," Gustavo Arruda, an economist with BNP Paribas, said in a note.
"The global ratings agencies will ask for a credible consolidation plan to plug budgetary gaps if Brazil wants to avoid a downgrade of its sovereign credit rating."
The public sector's overall budget deficit, which includes interest payments, rose to 224.429 billion reais, or the equivalent of 5.94 percent of GDP between January and September.
Central bank data showed the widening budget gap pushed the country's net debt to 35.9 percent of GDP, its highest in two years. ($1 = 2.4229 Brazilian reais) (Reporting by Luciana Otoni; Writing by Alonso Soto; Editing by Jeffrey Benkoe)