* Share sales raise $21.9 bln this year, highest since 2010
* Foreign participation, however, way down from past
* Investors unenthused by sluggish economy, pace of reform
SAO PAULO, Nov 26 (Reuters) - This year has already been the biggest in a decade for share offerings from Brazilian companies, but there has been little sign of the foreign investor appetite that fueled prior rallies, as weak growth and divisive politics keep many on the sidelines.
Foreigners invested about 40% of the total raised in the first nine months of the year, according to B3 stock exchange data. That is a far cry from their average 70% participation in previous Brazilian capital market booms such as 2007 and 2010.
Not even the approval of a long-awaited pension overhaul last month the keystone of a market-friendly turn under President Jair Bolsonaro was enough to lure back international investors, according to bankers managing the transactions.
Foreign participation remained meager in the latest offerings, which brought the total raised in Brazilian share sales to $21.9 billion so far this year, the highest since local firms raised $48.7 billion in 2010, according to Refinitiv data.
Fund managers, analysts and advisors say sluggish recovery has given foreigners little reason to rush in, while polarized politics under Bolsonaro and the recent release of his leftist rival from prison have put some investors on edge.
"The political landscape and the risk of a reversal of the (market-friendly) measures that have been implemented in the last couple of years are the biggest challenges," said Frederico Sampaio, chief investment officer for Franklin Templeton Brazil.
A Brazilian Supreme Court decision this month allowed former President Luiz Inacio Lula da Silva to leave prison despite a bribery conviction, firing up left-wing supporters as he vowed to unite opposition to Bolsonaro's agenda.
Others say a meager economic outlook has offered little upside from recent share offerings, with most companies raising cash primarily to reduce debt, not to finance expansion.
Shareholders in need of capital, such as the Brazilian state, sold stakes in companies such as state-controlled oil company Petrobras SA, IRB Brasil Resseguros and Banco do Brasil SA.
"Brazil's potential economic growth is not very high and the unemployment rate is not expected to drop fast," said Andre Rosenblit, Banco Santander Brasil's head of equities.
Although the economy has shown signs of recovery, with inflation contained and interest rates at record lows, investors were expecting Bolsonaro's pro-business policies to take faster effect. A halting approach to pension reform also undermined faith in his dedication to other reforms.
Still, bankers expect international investors to return at a faster speed in 2020, as growth picks up.
"Some large long-only stock funds spent time analyzing the latest share offerings in Brazil following the pension reform, a good sign, but still far from the potential" said Fabio Nazari, global head of equity capital markets at Banco BTG Pactual SA.
Templeton, for example, acquired shares in some Brazilian IPOs, but Sampaio declined to name them.
A shift in foreign investors' perceptions could bring up to $36 billion more into Brazilian stocks, adding to the $81 billion now invested, according to Banco BTG Pactual SA, just considering portfolio adjustments allocating more to Brazil.
The calculations consider global, emerging market and BRIC funds' allocation in 2014, which were all above current levels.
Brazil, which is already the largest country in Latin American portfolios, could expand its share with political instability in South American neighbors Chile and Argentina.
"Brazil seems like a more attractive investment destination versus the rest of the region," said Pablo Riveroll, head of equities for Latin America at Schroders.
But it is unlikely that Brazil will win back its former weight in global emerging market portfolios. The country has dropped from a 16.3% share in such funds ten years ago, close to China at the time, to 7.7% this year.
By comparison, China now represents 31.9% of the MSCI index, up from 18.3% ten years ago, with a boost coming last year when MSCI added mainland Chinese stocks to its global benchmarks.
The weight of Latin America as a whole in emerging market portfolios could also be curtailed by recent instability, according to Cesar Mikail, equity fund manager at Western Asset.
Even without foreigners, Brazilian markets are expected to close the year at record levels, propped up by a steady flow of local investors into equities and out of fixed income markets, where interest rates have hit all-time lows.
"We have never seen such a long period with low interest rates," said Alessandro Farkuh, head of investment banking at Banco Bradesco SA.
A further allocation shift of 3 trillion reais ($714.6 billion) by local retail investors is also likely to keep the stake of Brazilians in share offerings higher than in the past.
Inflows to equity and hedge funds totaled 120 billion reais from January to October, according to industry group Anbima.
International investors are also worried about other factors that may be hurting flows into emerging markets, said Hans Lin, head of investment banking in Brazil at Bank of America.
"The global trade war, the state of U.S. economy and Brexit are risks that could impact investor appetite," he said.
($1 = 4.21 reais)
(Reporting by Tatiana Bautzer and Carolina Mandl; Additional reporting by Jamie McGeever and Marcelo Rochabrun; Editing by Brad Haynes and Andrew Cawthorne)