President Yudhoyono has promised to protect the poor

President Susilo Bambang Yudhoyono said late on Wednesday that fuel aid, which costs the nation a fifth of its annual budget, would be reduced after October.

Investors had been hoping for quicker action to ease the pressure put on state funds by record crude oil prices.

Concerns about Indonesia's ability to finance the aid have hammered markets.

The rupiah has lost more than 10% against the US dollar this year and tumbled in August, as Indonesia was forced to sell the currency to buy dollars and pay for crude oil imports.

The slide in the currency was only stopped by an interest rate rise, and hopes that President Yudhoyono would take decisive steps regarding the fuel subsidies.

'Cure the disease'

However, analysts said that the measures announced on Wednesday were vague and voiced concerns about a compensation package for the poor, which they said was state aid under a different name.

Higher fuel prices will hit the nation's most vulnerable people

"What the government is doing is like giving medicine to lower the temperature but not to cure the disease," said Doddy Arifianto, an analyst at Bank Mandiri.

The rupiah weakened on Thursday and was trading at 10,700 against the US dollar, compared to Wednesday's close of 10,350.

It hit a four-year low of 11,750 on Tuesday ahead of the president's announcement.

Jakarta's main stock index shed 2% in early trading on Thursday, before rebounding slightly.

Subsidies are a politically sensitive subject in Indonesia and President Yudhoyono was careful to point out that any changes would not hurt the nation's poorest.

Fuel protests contributed to the downfall of former President Suharto in 1998.