* Chavez popularity could suffer after devaluation
* Increased spending before election will soften blow
* Inflation will jump this year
By Frank Jack Daniel
CARACAS, Jan 9 (Reuters) - A devaluation of Venezuela's bolivar currency helps President Hugo Chavez's warchest before an election this year but his opposition smells blood in the unpopular measure, which will raise consumer prices.
In an attempt at jump-starting the recession hit economy of South America's top oil exporter, Chavez on Friday announced a new dual system for the fixed rate bolivar. It gives a better rate for basic goods in a bid to maximize revenue while limiting inflation.
The new system devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar in place since 2005.
The socialist Chavez believes the state should have a weighty role in managing the economy. During his 11 years in office he has nationalized most heavy industry. Business and finance are tightly regulated.
The devaluation of the bolivar is politically risky but means every dollar of oil revenue puts more bolivars in the government's coffers. That will allow Chavez to lavish money on social projects and fund salary increases ahead of parliamentary elections in September.
Opponents were quick to criticize the socialist president, who a year ago promised that the global financial crisis would not touch "a hair" of Venezuela's economy, saying the move will make people poorer.
"By establishing the exchange rate at 4.3 bolivars per dollar, the quality of life for Venezuelans is automatically devalued since we now have half the money we had before," said Caracas Mayor Antonio Ledezma, a Chavez opponent.
Opposition parties, emboldened by public dissatisfaction at frequent blackouts and water shortages and a 2.9 percent economic contraction in 2009, hope to strip Chavez of his parliamentary majority in September elections for legislators.
The devaluation is embarrassing for Chavez, who resisted calls from economists and many government allies to make the move last year when oil prices were at their lowest and elections a long way off.
"Venezuela's decision to devalue the Bolivar culminates an event that the market has been anticipating for a long time," said Walter Molano, an analyst at BCP Securities. "It helps alleviate the country's fiscal woes and puts it on a sounder macroeconomic footing."
The measure makes Venezuelan businesses more competitive by lowering the cost of its products overseas and making imports more expensive.
However, Chavez risks taking a blow to his popularity ratings, which are about 50 percent, as prices for many products inevitably will rise in the country of 28 million people, which relies on imports for much of its consumption.
Finance Minister Ali Rodriguez said the devaluation will add 3 percent to 5 percent to inflation, already the highest in the Americas at 25 percent last year.
"The popularity of the government is obviously going to be sharply and negatively affected," said economist Pedro Palma. "The inflationary impact of the measure diminishes the real income of people. People can consume less."
The new two-tiered exchange system offers the 2.6/dollar rate for goods deemed essential, including food, medicine and industrial machinery. Other products, including cars and telephones, will be imported at the higher 4.3 rate.
The devaluation also will affect foreign companies operating in Venezuela who will now have to pay more to repatriate profits.
Economist Pavel Gomez of the IESA economic school said the scheme would increase opportunities for graft in a country that already is corruption-ridden.
"Multiple exchange schemes are incentives for corruption, more so if they are applied in the Venezuela way," he said. "Those who have good contacts can buy at 2.6 and sell at 4.3."
Chavez, whose popularity usually rises on correlation with public spending, also said on Friday that the Central Bank had transferred $7 billion of foreign reserves to a development fund used to finance investment projects.
(Reporting by Eyanir Chinea and Hugh Bronstein; Editing by Bill Trott)