"This is about preserving the country's sovereignty, while maintaining the auction with areas that are not linked to the discovery," said Brazilian Cabinet chief Dilma Rousseff, explaining the decision to pull blocks linked to the find from a licensing auction on 27 and 28 November.

Petrobras saw its shares soar today it confirmed it had struck high-quality light oil below a salt dome at the Tupi field in the Santos basin.

The company announced the results of tests which suggested recoverable reserves of between 5 billion and 8 billion barrels, representing about half of Brazil’s existing reserves and making Tupi the biggest discovery in the country’s history,

Company officials said commercial production could begin in five to six years. A pilot project should start in 2010 or 2011 with an aim to gradually reach an output of 100,000 barrels per day.

Petrobras also said it had made an evaluation of subsalt potential in southern and south-eastern basins and said the outlook was promising.

"If confirmed, the recoverable volumes of oil and gas will lift significantly the quantity of existing oil in Brazilian basins, putting Brazil among the countries with big reserves of oil and gas," Reuters reported the company said in a statement.

Rousseff went even further, saying: "We could get to the level of Saudi Arabia and Venezuela."

The subsalt-related blocks excluded from the auction are in the Espirito Santo, Santos and Campos basins, Rousseff said, adding that 271 blocks will still be offered.

The surprise move to pull the blocks from the auction was likely to cool the appetite of big foreign oil companies.

"The auction loses a lot of its appeal, especially for big players. There are still some interesting blocks, but the prime cut was taken out," said Caio Carvalhal, research associate with Cambridge Energy Research Association in Rio de Janeiro.

"The government isn't entirely wrong doing that, but Brazil's image will suffer a bit, especially with the backlash from last year's cancelled auction," he said.

Last year's annual sale was called off halfway through due to a court injunction.

Petrobras shares rallied 14.16% to close at 80.20 reais on the news. Shares of its partners in the project, BG Group and Portugal's Galp, also soared, by 9.77% and 13.77%, respectively.

BG has a 25% stake in the Tupi project and Galp's Petrogal unit has 10%.

Brazil's previous biggest find, the Roncador field, has around 3 billion barrels of recoverable heavy oil reserves.

Brazil's total proven reserves are around 12 billion barrels, mostly low-quality heavy oil. Petrobras produces around 1.8 million bpd of oil, meeting Brazil's gross petroleum needs. But it still needs to import some light crude to mix with local heavy crudes for refining.

BG said in February Tupi could contain between 1.7 billion and 10 billion barrels of in-place reserves. The new reserve estimate exceeded expectations by most analysts.

Published: 08 November 2007 22:28 GMT  | Last updated: 09 November 2007 10:53 GMT