The decision was made in a curt announcement on leftist President Rafael Correa's Web site. Both payments were due Monday.

They apply to most of the 40 per cent of Ecuador's US$10 billion debt that Correa calls "illegitimate".

He said Saturday that he plans to present a proposal that would recognise some of that debt "but at a much lower price".

Profiting irresponsibly

A presidential commission has accused former officials and bankers of profiting irresponsibly from the bond deals that Correa questions.

Analysts call Correa's decision to default extremely risky, saying it would likely cut Ecuador off from outside financing, as it faces an expected budget shortfall from plummeting oil prices. Oil accounts for 40 per cent of Ecuador's national budget.

Correa's moves "will push away what little foreign investment we have in the country, make credit scarcer and more conditioned, and entangle Ecuador in lawsuits", banker and economic analyst Abelardo Pachano told Canal 4 TV.

Capital flight

Some economists believe the defaults will encourage capital flight that could force Ecuador to abandon the dollar as its currency.

But, a former Correa finance minister, Wilma Salgado, called the default "absolutely necessary to shake global consciousness into seeing how corrupt the management of the world financial system has become".

Before his 2006 landslide victory, Correa promised to slash foreign-debt payments, saying social spending would be a priority. He has since launched programs including monthly payments to single mothers, and voters in September approved universal education through college.

The default announced Monday applies to $650 million worth of bonds due in 2015. The one Correa announced Friday was on $510 million in bonds due in 2012.

A third set of bonds that Correa also considers illegitimate comes due in 2030. It's worth $390 million and its next interest payment is due Feb. 15.

Some analysts believe that Correa, who has a doctorate in economics from the University of Illinois, deliberately threatened to default in order to drive down the value of his nation's bonds as he seeks to renegotiate their terms.

Prices falling

The 2012 bonds had already plunged to a quarter of their September value as default speculation swirled.

Bond prices fell further on Monday.

The price of the 2012 bonds fell 13.6 per cent to US$25.50, and the price of the 2015 bonds fell 17 per cent to US$24.50.

The 2030 bonds dropped 19.5 per cent to US$24.

Ecudorean Finance Minister Maria Elsa Viteri, would neither confirm nor deny an Ecuadorean newspaper report that the government had recently bought $680 million in its own debt.

Ecuador's total foreign debt accounts for about one-fifth of gross domestic product.

- AP