Brazilian President Jose Sarney's selection of the head of the nation's development bank to be his new finance minister indicates Sarney has decided against making stringent budget cuts to hold down the nation's soaring inflation, diplomats and Brazilian sources said today.

Late Monday, Sarney picked Dilson Funaro -- a Sao Paulo toy executive who runs the development bank -- to replace Francisco Dornelles, who resigned earlier in the day.

Meanwhile, Fernao Bracher, director of international operations for Brazil's largest private bank, Bradesco, was appointed Tuesday as president of the Central Bank, United Press International reported.

Bracher, who was a member of the Central Bank board of directors from 1974 to 1979, was named to replace Antonio Carlos Lemgruber, who resigned Monday in a dispute over the debt-ridden nation's policies, UPI added.

Dornelles is a fiscal conservative who advocated severe cuts in government spending, tax increases and a tight money policy to keep the nation's 220 percent inflation rate from accelerating.

Planning Minister Joao Sayad favored less-stringent budget cuts, an increase in spending on social welfare and a looser monetary policy to reduce exorbitant interest rates.

Funaro's appointment appears to strengthen Sayad's hand and suggests that for now, at least, Sarney is worried less about accelerating inflation than he is about Brazil's poverty, health and sanitation problems.

Observers here said Funaro's appointment took on added significance because it is the first appointment Sarney has made since he became president in April.

Sarney was elected vice president and became president when Tancredo Neves, the nation's first elected civilian president in 21 years, died before taking office. Sarney, who has almost no political base, has put up with a warring cabinet -- originally appointed by Neves -- because of his inability to find ministers he felt would be acceptable to all factions in his fragile ruling coalition.

Sayad and Dornelles agreed that inflation has to be substantially reduced, but they differed over the urgency of the problem and its causes. Sayad said in an interview last week that, because inflation has held constant at about 200 percent for the last three years, the chances of it veering even higher -- to levels it reached in neighboring Argentina -- were not great.

Nevertheless, bankers and more conservative elements of the Brazilian community are concerned that Funaro's appointment might spell a more confrontational approach to negotiating with bank creditors and the International Monetary Fund.

Last week, Dornelles and Lemgruber negotiated a 140-day extension on Brazilian debts that mature between now and January. The extension was designed to give the banks and Brazil time to negotiate a new agreement with the IMF, the international lender of last resort, and the banks. Brazil is the developing world's biggest debtor, with more than $100 billion of foreign loans.

The country is current on all its payments to banks and other lenders.

Funaro, 52, is recovering from cancer surgery. He is considered a liberal businessman who was one of the first to support a social movement for direct election of a president.

He is a personal friend of Sarney and has been finance secretary of the State of Sao Paulo, a position that planning minister Sayad has also held.

He owns controlling interest in a big Sao Paulo toy manufacturer, Trol, and was named by Neves to head the development bank last March.

As if to underscore the commitment to social spending, within hours of Funaro's appointment, the goverment announced a special $2 billion program to assist children.