BRAZILIAN President Fernando Collor de Mello lost an important battle Tuesday in his bid to modernize the economy when opposition politicians and labor unions forced him to call off the auction of a state-owned steel mill.Usinas Siderurgica de Minas Gerais S.A. - or Usiminas, as the mill is known - is Latin America's largest steel plant and one of the few state-owned enterprises in Brazil that makes a profit. Still, it was set to be sold off until a presidential government spokesman said Mr. Collor had temporarily suspended the auction because it could not take place in a "climate of dispute and violence." The National Bank for Economic and Social Development, which is responsible for Brazil's privatization program, was set to meet late this week to decide on a new auction date following a judge's decision late Tuesday to allow the Usiminas sale under the Bank's original rules. The auction of 75 percent of the company's voting shares (the rest belonging to Japanese-owned Nippon Usiminas) was to have kicked off the sale of more than 20 of Brazil's 200-odd state enterprises. Collor had vowed to sell one such company a month after coming to office in 1990, as part of his plan to clean up government and modernize the economy. But so far, the plan, which also includes proposed changes in the Constitution, has come up against formidable legal, bureaucratic, and political obstacles. Those obstacles are the institutional face of a deep emotional response on the part of many Brazilians, shaken by the prospect of economic reform, and suspicious of business - especially foreign business. Under the plan, foreigners could buy up to 40 percent of Usiminas. These attitudes are likely to continue to undercut Collor's reform plans. "I don't believe [potential buyers] will invest in Usiminas," says Daniel de Oliveira Miranda, a mill worker protesting Tuesday afternoon in front of the Rio de Janeiro stock exchange. "Maybe they are buying Usiminas to close it, to remove a competitor." Mr. Oliveira is also afraid of layoffs. "Private capital is geared only to profit, it doesn't consider the man," he says. The protesters, mostly from the independent labor confederation, Central Unica de Trabalhadores, at one point tried to force their way into the exchange building. They chased men dressed in business suits, threw eggs, and chanted slogans against the Usiminas sale. In the melee, a guard reportedly fired his gun into the air, grazing one person. Such emotion has built up over decades as Brazilians have sought economic growth via self-sufficiency. Beginning in the late 1940s, the government set up state enterprises to create the infrastructure needed for industrialization, which was often too costly for private companies to pay for. Eventually the government was in the business of making steel, petrochemicals, fertilizers, aircraft, and computers, among other products. That policy also helped create a nationalist mentality, analysts and business people say. Alexandre Jose Barbosa Lima Sobrinho, one of the original promoters of a state petroleum monopoly and now president of the Movement in Defense of the National Economy, says "the profits [from privatized companies] would go to foreign countries for their savings. We have to defend Brazilian savings." Many Brazilian economists and businessmen disagree with him. They argue that foreign investment is sorely needed to make up for a domestic shortfall, and that greater international exchange brings prosperity for all. Some businessmen fear suspending the auction will hurt Brazil's image with foreign investors. "With this, Brazil gets further and further from being a country that deserves investment," says Marco Ruberti, a stockbroker from Sao Paulo who flew to Rio for the auction but spent the afternoon on a street near the stock exchange watching the protesters from a safe distance. During the last two months the privatization issue has become a public duel between the government, on the one hand, and politicians linked to labor unions and those from Minas Gerais, the state where the mill is located, on the other. Opponents of the auction are especially concerned that Usiminas shares, which will be sold at a minimum nominal price of $1.5 billion, will virtually be given away. This is because the auction rules permit share purchases using discounted Brazilian foreign debt instruments . Many Brazilian economists say that the state once did play a crucial role in Brazil's industrial development. But they add that the government's weakening financial situation during the last decade forced cutbacks on needed investments, turning many utilities into white elephants. Opinion polls show a majority of Brazilians support privatization. Such convictions form the basis for the Collor government's commitment to reschedule the Usiminas auction, privatize additional companies, and take other measures to boost trade, efficiency, productivity, and growth. But, as Collor is learning, managing such changes in a new democracy spread over a huge geographic region with 140 million people of various ethnic backgrounds is a challenge. Speaking last Friday in Sao Paulo, Economy Minister Marcilio Marques Moreira noted that countries such as Mexico and Chile first undertook tough reforms while governed under more autocratic regimes, unlike Brazil, which faces entrenched interests empowered by democracy. Brazil, Mr. Moreira said, "ticks at a slower rhythm, being a continental-size country. We are trying to show society that this time change has to be fast."