(Add president's comments at swearing-in of new minister, paragraphs 7-9)
By Alonso Soto and Bruno Federowski
BRASILIA/SAO PAULO, Dec 21 (Reuters) - Brazil's incoming finance minister, Nelson Barbosa, sought on Monday to calm investors by pledging to continue with austerity measures but markets still fell sharply on worries the leftist economist could stall his predecessor's belt-tightening drive.
The real currency and Brazilian stocks had tumbled on Friday as news spread that President Dilma Rousseff had picked Barbosa, a close aide, to replace fiscally conservative Joaquim Levy. Levy left the administration after disagreements over the size of next year's budget cuts.
In a conference call with foreign and local investors on Monday, Barbosa promised he would take all measures needed to bolster government savings and meet fiscal targets next year.
Still, markets extended losses as many investors worried that Barbosa will prioritize economic growth over austerity, further widening a deficit that surged to nearly 10 percent of the gross domestic product over the past two years.
"The problem was not so much what he said, but what he didn't say," said Paulo Celso Nepomuceno, a strategist at Coinvalores brokerage. "The speech was pretty much the same as before (the appointment of Barbosa), but the market is convinced that policy will change for the worse."
The real currency weakened further after Barbosa's comments, falling more than 2 percent to pass the mark of 4 reais to the dollar for the first time since September. The benchmark Bovespa stock index also shed 1 percent of its value following his remarks.
Rousseff sought to reassure investors that her new economic team will not veer off the course of fiscal austerity.
"The change of ministers will not alter the goal of balancing the economy and restoring growth," Rousseff said at the swearing-in of Barbosa.
His tasks include reviving the unpopular CPMF financial-transaction tax and reducing mandatory spending, she said.
Although his appointment was not welcomed by Wall Street, Barbosa could help Rousseff defuse the threat of impeachment - over allegedly breaking the country's budget laws - by winning over support from her fractious alliance in Congress, many of whom disliked Levy's aggressive belt-tightening.
Barbosa, who until recently served as planning minister, in the past publicly criticized Levy's tough austerity plan, voicing concerns that the adjustment could hinder any recovery as Latin America's largest economy sinks into its worst recession in 25 years.
Barbosa will be under pressure to raise public spending next year ahead of nationwide municipal elections seen as a key for Rousseff to gather support against impeachment.
In the call, Barbosa said fiscal recovery hinges on a return to economic growth and the government should refrain from dramatic cuts in public investments to allow economic activity to pick up speed.
He said the government will move on reforms to limit expenditures, starting with a proposal to set a minimum age for retirement in order to cap a surge in social security spending.
Brazil has one of the world's most generous pension systems with some Brazilians retiring in their 50s with full benefits. Pensions as well as congressionally mandated expenditures on health and education make up nearly 90 percent of the country's overall budget spending.
Investor confidence in Brazil has fallen sharply in recent months. Brazil lost its coveted investment-grade rating on Wednesday after Fitch became the second credit agency to downgrade the country's debt to junk status, citing concerns about the economic and political crisis. (Reporting by Alonso Soto and Bruno Federowski; Additional reporting by Anthony Boadle; Editing by Frances Kerry and Will Dunham)