Brazil this week faces two crucial questions of national importance, whether its footballers have the skills to make the final of the World Cup, and whether its political leaders have the ability to prevent debt default.

The biggest and most populous South American nation will recover if beaten by Turkey.

But if Brazil fails to calm the markets, the consequences could be disastrous for the whole region.

Last week, the Brazil stock market fell 11 per cent, its currency - once on a par with the US dollar - plunged to an all-time low of 2.809 real against the dollar.

It continued sliding yesterday, reaching 2.829 by midday, as concerns deepened about its ability to roll over $290 billion (€297 billion) in public debt.

Compared with its neighbours, especially Argentina, Brazil is a success story; the economy is growing and inflation is well in check. But its political future is uncertain, and this is undermining international investor confidence.

Senator Luiz Inacio da Silva of the left-wing Workers' Party seems likely to win the presidential election in October.

The prospect that the former union official will be anti-market, and that he will increase public spending, has driven down the real, making debt repayment more difficult.

The International Monetary Fund (IMF) last week allowed Brazil to draw $4.8 billion from its $15 billion credit line, but US Treasury Secretary Mr Paul O'Neill bluntly warned that the IMF might refuse more loans.

"Throwing the US taxpayers' money at a political uncertainty in Brazil doesn't seem brilliant to me," he said.

"The situation there is driven by politics. It's not driven by economic conditions."

Brazilian officials were furious at the remark, which was categorised as "stupid arrogance" by the Estado de Sao Paulo newspaper.

The English-language Brazilian Times said Mr O'Neill's comments and a downgrade of Brazil's foreign currency sovereign rating to B+ from BB- by Fitch Ratings were more than enough to "crush" all Brazilian markets last Friday.

Mr da Silva promised on Saturday that Brazil would honour debt obligations, keep inflation low and maintain budget surpluses as long as necessary to contain the debt burden.

Any change to Brazil's economic model would only be made through political consensus.

His pledge was designed to erase fears that he would radically change current policies.

How the markets react this week will be a test of his credibility.

Brazil has reduced government spending and maintained high interest rates to support the real.

Its central bank governor, Mr Arminio Fraga, highly respected in Washington, declared again yesterday that there was no chance of a default.

He told Newsweek that investor fears were exaggerated and that part of the blame could be attributed to Argentina, which defaulted earlier this year and is watching the Brazil crisis with growing apprehension.

Having "an important trading partner who's doing very badly doesn't help", Mr Fraga said.

He said the IMF credit was enough to see Brazil through the current crisis.

Argentina received a setback in its negotiations with the IMF when central bank governor Mr Mario Blejer - who worked for 20 years at the IMF - announced he would resign after five months.

Mr O'Neill clarified his comments after leading Brazilian government officials had high-level discussions with the Bush administration.

"The Brazilian government is implementing the right economic policies to address the current difficulties," he said.

"Brazil has not requested any new funds and its economic fundamentals are strong."