Desperately seeking a way out of a deep financial crisis, Brazil said its inflation-busting real would be allowed to fall in value at a faster pace and that the staunch defender of the currency, Central Bank President Gustavo Franco, would resign.

Brazil's foreign exchange policy has served as the anchor of the country's four-year economic recovery after decades of high inflation. Its stability was crucial for international confidence in the world's eighth biggest economy.

Markets have long considered the real overvalued but feared a devaluation might spark the kind of crisis of confidence among investors that plunged Russia and much of Asia into chaos after they bungled devaluations last year.

The news from Brazil immediately spilled over into global financial markets, with falls of nearly two percent in the US stock market and as much as five percent in European markets like the Frankfurt bourse.

The announcement sent shivers through the rest of Latin America. Announcing his resignation, Brazil's Franco put a brave face on the crisis, saying he recognised that Latin America's biggest economy needed to change its controversial economic policy mix of an overvalued currency and high interest rates.