Brazil's currency has hit new record lows as the financial markets panic over the possible victory of a left-wing candidate in October's presidential elections.

The real, introduced in 1994, fell to 2.94 against the US dollar from Monday's record low close of 2.89, leaving the currency 21% below where it began 2002.

Fraga tries to calm the markets

Just minutes after the real chalked up new lows, Brazilian Central Bank President Arminio Fraga said the sharp declines were a "flagrant exaggeration".

Brazilian markets have slumped in recent weeks over fears that Latin America's largest economy, with debts of $250bn, could soon be ruled by Worker's Party candidate Luiz Inacio Lula da Silva.

Sao Paulo Stock Exchange's Bovespa index fell 1.5% to 10,727, which is also 21% below where it began the year.

Confidence building

"When the market gets into this mood, good news takes a certain time to come to the surface and be realized as such," Mr Fraga told a news conference.

"It's typical for the markets to go through these bipolar movements," he said.

Mr Fraga, who last week tried to owe European investors with visits to London and other capitals, said his economic team was trying to persuade foreign investors, that Brazil was not going to be the next basket case.

He added it made no sense to believe the next government was about to commit "economic suicide".