(Adds minister and lawmaker comments and context)
By Alonso Soto and Leonardo Goy
BRASILIA, Feb 29 (Reuters) - Brazil plans in the first half of the year to propose to Congress an increase in the foreign ownership of local airlines, Interim Aviation Minister Guilherme Ramalho told Reuters on Monday, in a market-friendly move to help the struggling sector.
The government continues to discuss the percentage increase in foreign ownership, but believes an increase from the current 20-percent limit is key to bolster investment in local airlines, Ramalho said.
"This is a very favorable moment to attract foreign investment... we should not restrict the access of capital of these companies," said Ramalho. "The government has a joint position on this matter and that is key for its approval."
The proposal reflects President Dilma Rousseff's major shift in policy to open up one of the Western Hemisphere's most-closed economies and bring in badly needed capital to halt a recession entering its second year.
Ramalho said it is "very possible" that the government will propose an initial increase in the foreign ownership stake to be followed by another depending on market reaction and foreign interest.
The Finance Ministry is working on a proposal to raise the ownership stake cap to 49 percent from 20 percent with the option of acquiring a controlling stake if approved by local aviation and competition authorities, a government official told Reuters.
Brazilian airlines such as Tam and Gol Linhas Aéreas Inteligentes SA have cut flights and fired staff to cope with what is expected to be the country's worst recession in a century. The sharp depreciation of Brazilian real has exacerbated the crisis in the country's aviation sector.
Ramalho said the government has not yet decided if it will adopt any of the current bills to remove capital restrictions or make the change via a presidential decree, which will ultimately have to be ratified by Congress.
There are currently around 68 bills in the Lower House of Congress and two at the Senate to lift limits on foreign ownership.
One of them, which is under review by deputy Clarissa Garotinho, calls for the complete removal of restrictions.
"I believe that we need to move ahead with a bolder proposal because increasing the stake to 49 percent will not solve the problems of the aviation sector in Brazil," Garotinho said.
Once a rising emerging market star with a expanding middle class that triggered a boom in air travel Brazil's economy is now in tatters. The economy is expected to contract 8 percent between 2015 and 2016, driving down flight demand and threatening the survival of local airlines.
Brazil's airline market is dominated by TAM, the Brazilian flag carrier of Santiago, Chile-based Latam Airlines Group SA , Gol Linhas Aéreas Inteligentes SA, which is part owned by U.S.-based Delta Airlines Inc., Avianca Brasil and Azul Linhas Aéreas Brasileiras SA.
Removing ownership restrictions will trigger a rally in local airline shares and help Delta increase its stake in Gol, analysts say.
Ramalho also said that plans to open up the capital of Infraero, the state-run company that controls most of Brazil's airports, would be delayed until 2017 given current negative market conditions. (Reporting by Alonso Soto; Editing by Daniel Flynn and Alan Crosby)