Brazil provoked a new round of nervousness in international financial markets yesterday after one of the country's largest state governments formally declared a moratorium on its 18.5 billion real (17.8 billion) debt to the Brazilian federal government.

The announcement that Minas Gerais, the third most economically powerful state, had suspended interest payments for three months, rekindled fears that Brazil would not be able to implement a fiscal austerity plan agreed with the International Monetary Fund. The plan was designed to stave off a currency crisis, which could have serious knock-on effects in markets worldwide.

Analysts said the moratorium could create a serious crisis for the government of Mr Fernando Henrique Cardoso if other states followed suit.