Ecuador's debt prices immediately plunged on news of the country's second default in a decade and the first in Latin America since Argentina in 2002.

Correa, a US-trained economist and ally of anti-US Venezuelan President Hugo Chavez, refused to make a $31 million interest payment due on Monday on 2012 global bonds, saying the debt was contracted illegally by a previous administration, said a Reuters report.

"I gave the order not to pay the interest and to go into default," Correa said. "We know very well who we are up against -- real monsters."

Speaking at a news conference in the Opec nation's largest city of Guayaquil, Correa said he will also offer bond-holders a restructuring deal. Ecuador's global bonds -- the 2012s, 2015s and 2030s -- total $3.8 billion of its roughly $10 billion debt.

Ecuador, which received record income from oil exports for much of the year, has enough funds to make the payment. But the nation's policy is driven by Correa's ideological rejection of such debt deals with foreign investors, Wall Street economists say.

Correa's decision is his harshest against foreign investors in almost two years in office and in keeping with a shift toward confrontation in the region between leftist governments and foreign investors.

But the move is not expected to have a knock-on effect in other Latin American countries' debt policies even if some, such as Venezuela, have pledged to investigate any irregularities in their own debt, economists say.

The move will likely lead to investor lawsuits against Ecuador, close off credit lines to the oil- and banana-exporting nation and cause foreign investment into areas such as mining to dry up.

Ratings agency Standard & Poor is likely to downgrade Ecuador's credit rating to "Selective Default" from "CCC-," one of the agency's analysts said after Correa's announcement.

Published: 12 December 2008 22:20 GMT  | Last updated: 23 December 2008 15:07 GMT