* Tombini does not rule out using reserves to boost currency
* Real rebounds, ends day below 4 per dollar
* Unemployment rate rose in August to 5-year high
By Alonso Soto and Walter Brandimarte
BRASILIA/SAO PAULO, Sept 24 (Reuters) - Brazil’s currency rebounded strongly after the central bank vowed to defend it with every weapon it had, lifting the real off all times lows struck earlier on Thursday as investors fretted over the outlook for Latin America’s largest economy.
A growing political crisis that threatens to unseat President Dilma Rousseff and a deepening economic recession have dragged the Brazilian real to its weakest level since the currency was created in 1994.
The real plumbed a new low of 4.248 to the U.S. dollar before bouncing back to end the day at 3.99 after central bank president Alexandre Tombini warned he was ready to use Brazil’s $371 billion foreign reserves to calm the foreign exchange market if needed.
“In this process, all instruments are available for the central bank,” Tombini told an unscheduled press briefing. “Foreign reserves are an insurance that could and should be used.”
The currency rallied further, bringing its gains for the day to 3.0 percent, after the Treasury announced a program of daily debt auctions to provide liquidity to the local debt market.
Brazil’s main stock index also rebounded from earlier losses of as much as 2.0 percent and was up 0.2 percent in late afternoon trading.
Finance Minister Joaquim Levy said late on Thursday that the program helped ease market jitters and reaffirmed that some foreign reserves could be sold to dampen volatility.
Despite the pressure on the currency, Tombini reaffirmed the central bank’s policy of keeping interest rates at current levels for a prolonged period even as it raised its inflation forecast to well above its official target.
In a quarterly report released on Thursday, the bank raised its 2016 inflation forecast to 5.3 percent from 4.8 percent.
The worsening inflation outlook added the difficulties for policymakers, reluctant to raise interest rates during a worse-than-expected recession.
Unemployment rose for an eighth straight month in August to the highest in over five years, although the increase was slightly smaller than markets expected, data showed on Thursday.
Some economists warned the central bank risked putting the real under more pressure if it does not raise interest rates at its next scheduled rate-setting meeting on Oct. 21.
“If the central bank does not hike in the next meeting, they will see another round of deterioration,” Santander Securities strategist Sandro Sobral said in a note to clients.
The crisis has fueled concern that another credit rating agency will follow Standard & Poor’s example and cut Brazil’s rating to junk status, forcing many global funds to dump its bonds from their portfolios.
Treasury Chief Marcelo Saintive said on Thursday that Brazil would be able to avoid further credit rating downgrades if it succeeds in approving its latest fiscal package and showing long-term commitment to rebalancing its public accounts.
Roussef’s efforts to shore up deteriorating government finances will face a major test on Wednesday, when Brazil’s Senate votes on whether to overturn presidential vetoes aimed at averting a surge in public spending.
Rousseff’s approval ratings have cratered to single digits less than a year after she was re-elected last October, under pressure from the darkening economic outlook as well as a corruption scandal raging around key members of her Workers Party. (Additional reporting by London, Sao Paulo, Brasilia and Rio de Janeiro bureaus; Writing by Christian Plumb; Editing by Simon Cameron-Moore)