The Brazilian Government may block an $80 billion (£40 billion) bid by Vale, the Rio-based miner, for Xstrata amid fears that it could halt investment in the country’s resources industry.

Political sources in Brazil have revealed that the Government is worried that Vale’s international aspirations might come at the expense of the domestic mining sector.

Vale, formerly known as CVRD, already has huge iron-ore resources in Brazil, but it missed out on an opportunity to expand them last week when Anglo American paid $5.5 billion to take control of MMX.

Natural resources are a vital earner of revenue for the Brazilian Government and it wants to develop more deposits. The Government could block the bid because it controls more than half of Vale’s shares through BNDESPar, an investment holding company for the state development bank, and Previ, the pension fund for state-run Banco do Brasil.

Despite the political concerns, Vale is pressing ahead with its attempts to complete a deal with Xstrata.

The Brazilian press reported on Friday that Vale had secured about $50 billion in financing from banks including HSBC, Lehman Brothers and BNP Paribas.

Vale is likely to offer Xstrata a cash-and-shares deal, with $30 billion of stock going to Glencore, the commodities trader that owns 35 per cent of the Anglo-Swiss miner. However, the package is also understood to concern the Government. Political sources said that members of the Government were unhappy about a transfer of Vale stock to a foreign company.

Government aides have cited the experience of Ambev, the Brazilian brewer, which was bought by Inter-brew, of Belgium, in 2004 for $11 billion, as a reason to block the bid. That deal created InBev, the world’s largest brewer, but the Brazilians feel that they have lost control of one of their corporate stars.

Yet the greatest challenge to Vale’s ambition to take control of Xstrata remains the turbulent financial markets. Bankers in London have questioned whether Vale has been able to secure financing for its bid because credit markets remain very tight. BHP Billiton’s £70 billion for Rio Tinto has already tied up about $110 billion in financing and this is understood to be limiting the options for other would-be dealmakers.

Neither Vale or Xstrata would comment yesterday.

President da Silva of Brazil refused to comment on the bid last week, despite having dinner with Roger Agnelli, Vale’s chief executive. He said: “At a certain time the Government will be called to discuss [the subject] and we’ll discuss it. Then, when we know what the situation is, what is the proposal, we can say ‘yes’ or ‘no’.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive