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UPDATE 4-Petrobras scuttles diesel price hike at Bolsonaro's behest, spooking investors

Lisandra Paraguassu and Rodrigo Viga Gaier

investors@ (Recasts to reflect VP's comments, adds comments, context)

BRASILIA/RIO DE JANEIRO, April 12 (Reuters) - Brazil's Petroleo Brasileiro SA canceled a diesel price hike on Friday at the behest of Brazilian President Jair Bolsonaro, spooking investors wary of political interference at the state-run oil firm.

Preferred shares dropped 4.3 percent in Sao Paulo trading as the abrupt reversal raised doubts about pledges to separate politics from business at Petrobras, which sold fuel at a loss for years under pressure from previous governments.

Although Bolsonaro vowed orthodox economic policies in his far-right presidential campaign last year, his first 100 days in office have raised concerns that more populist factions in his government may have an upper hand over free-market voices.

Petrobras announced on Thursday afternoon it would raise diesel prices by 5.7 percent to the highest level since October, effective on Friday, then disclosed it was backing off in an early-morning securities filing.

In a radio interview on Friday, Vice President Hamilton Mourao said Bolsonaro had pressured Petrobras to cancel the price hike, but added he had "absolute certainty" that it was a one-time matter.

Bolsonaro called Petrobras chief executive Roberto Castello Branco late Thursday to address the sharp price hike after discussing the matter with his chief of staff, according to a source in the presidential palace.

Petrobras did not immediately respond to requests for comment on Bolsonaro's role in the decision.

Last year, a huge truckers strike over high diesel prices paralyzed much of Brazil and led the government to intervene in Petrobras' pricing policy. Then-CEO Pedro Parente quit in protest and the company's share price was nearly halved in a month.

Petrobras updated its diesel pricing policy last month, saying prices would not be readjusted more than once every 15 days and reaffirming it would not price the fuel below parity with international markets.

"It's a shame because all that's been said by the government up to now is that you're going to have prices tied to international prices, and Petrobras is going to have independence when it comes to pricing policy," said Adriano Pires, a consultant at Brazil's Center for Infrastructure.

He added that the move could complicate Petrobras' plans to sell two groups of refineries over fears the government might intervene in refinery fuel pricing. That sale would raise several billion dollars if successful.

Analysts at UBS led by Luiz Carvalho pointed to a March announcement that Petrobras would take part in a gas tender in Israel, an ally of the Bolsonaro government, as evidence that the price hike reversal is likely part of a larger trend of government interference at the firm.

GHOSTS OF GOVERNMENTS PAST

Petrobras said in the Friday filing its current hedge position allowed it to delay a price revision for "some days," without detailing its plans for a future readjustment.

Although Bolsonaro has decried the economic mismanagement of his predecessors and vowed to follow the lead of his market-friendly Economy Minister Paulo Guedes, he is a late convert to free-market ideas and was an early backer of the 2018 trucker strike.

The reversal was stirring concerns that Petrobras could again be forced to foot the bill for cheaper fuel in the Brazilian market, according to a person close to the company.

"Bolsonaro is engaged in exactly the same dangerous populism as Dilma (Rousseff)," said the source, referring to the former leftist president who served from 2011 to 2016. "If you want to question the policy, then do that through the board of directors. But price decisions are made by the management, not the president of the republic."

Bolsonaro installed Castello Branco as CEO at Petrobras after his January inauguration, with a mandate to extend asset sales and focus on the core activities of offshore oil exploration and production. (Reporting by Lisandra Paraguassu, Rodrigo Viga Gaier and Gram Slattery; Additional reporting by Carolina Mandl and Marta Nogueira in Sao Paulo; Editing by Brad Haynes, Jeffrey Benkoe and Rosalba O'Brien)