Brazil's Central Bank has raised interest rates by three percentage points to prop up the weakening currency and halt inflation.

After a special meeting of the bank's governing council, it lifted rates to 21% but gave no indication of future moves.

Fraga could be sacked if Lula wins

In a statement, the bank said the rise was necessary because of "rising prices and worsening expectations regarding inflation due to the accentuated depreciation of the currency".

The Brazilian currency, the real, has lost about 40% of its value this year, and hit an all-time low last Thursday when it fell below four to the US dollar mark.

Financial markets have been panicking because a left-wing candidate in the second and final round of presidential elections on 27 October looks likely to win.

Workers' Party candidate Luiz Inacio "Lula" da Silva opposes many of the free market reforms of the current government that have push unemployment from 4.2% when it took office in 1995 to the current 8.2%.

No support

The rate rise follows a number of measures unveiled on Friday to prop-up the sagging real, but which failed to support the currency.

The real traded at about 3.86 real to the dollar after the central bank announcement.

The real's depreciation has pushed inflation for the first nine months of this year to about 5.6%, above the 5.5% target the government had set for the whole year.

Mr da Silva has already said he would sack the Central Bank governor Arminio Fraga if he was elected president and replace him with someone who understands the Brazilian people's problems.

The rate increase will dampen an already sluggish economy and is expected to slow growth to less than 1% this year.

Financial markets also fear the currency to collapse might cause Brazil to default on about $260bn of debt.

In August the IMF stepped in with a $30.4bn bail-out package, but most of the money is not available until after the elections.