By Samantha Pearson and Luciana Magalhaes

SÃO PAULO -- Oil giant Petrobras lost almost a fifth of its market value Monday after Brazil's President Jair Bolsonaro named an army general to take over the company in an apparent bid to control fuel prices, sparking a crisis of confidence as investors soured on his administration's commitment to free-market policies.

Mr. Bolsonaro's plan to appoint Gen. Joaquim Silva e Luna, who served alongside the president decades ago under Brazil's military dictatorship, came as a blow to the oil producer. Petrobras -- officially Petróleo Brasileiro SA -- had spent the past few years trying to regain investors' trust and selling billions of dollars of assets following an overspending binge under prior administrations that nearly drove the company bankrupt.

"Bolsonaro's impetuous decision to replace the CEO of Petrobras with an army general is a red flag indicating a turn towards populist policies," TS Lombard, an investment-research firm, said on Monday in a note to investors. The London-based company said the president's plans indicate a shift toward the generous fuel-price subsidies that marked the leftist government of Dilma Rousseff, who was removed from office in 2016.

Since Friday, Petrobras has lost close to $20 billion in market value. The price for its preferred shares fell from 27.33 reais, or $5.00, at the close on Friday to 21.45 reais, or $3.92, by Monday's close. The decline was the single biggest fall in Petrobras shares since March 9 of last year, when oil prices plummeted at the start of the coronavirus pandemic.

As investors fled Brazilian assets Monday, the country's Bovespa stock index fell nearly 5%, while Brazil's currency lost more than 1% against the dollar. Prices of bonds tied to Petrobras also fell.

Mr. Bolsonaro swept to power in the 2018 presidential elections, promising free-market policies capable of putting Latin America's biggest economy back on a path to growth after the worst recession in its history. The appointment of Paulo Guedes, a University of Chicago-trained economist who pledged privatizations and cutbacks to overspending by his leftist predecessors, soothed investors worried about Mr. Bolsonaro's erratic years in congress.

But as the pandemic ravaged Brazil, killing a quarter of a million people, the right-wing former army captain has increasingly embraced populist policies.

He has ramped up government spending and filled his administration with loyal fellow military men, appointing them to such key posts as health minister. And his free-spending ways -- he spent as much as $10 billion monthly to help the poor cope during the pandemic -- have resulted in ballooning government debt.

That has effectively sidelined the small government, pro-free market crusade Mr. Guedes had promised. Neither Mr. Guedes nor Mr. Bolsonaro's office responded to calls seeking comment.

"It's a complete disaster," said Maílson da Nóbrega, a Brazilian economist and former finance minister. He added that Mr. Bolsonaro is increasingly ruling like a populist by intervening in Latin America's largest company.

Under the rival leftist Workers' Party, Petrobras was used as a personal piggy bank for successive administrations: Between 2011 and 2016, it spent about $30 billion funding gasoline and diesel subsidies to combat inflation. It also lost billions of dollars to corruption in a scandal that ensnared company executives and politicians, say investigators.

Speaking to crowds of supporters this past weekend, Mr. Bolsonaro called Petrobras's management "cowards" for recent fuel-price increases, and accused the company of pandering to investors and having "zero commitment to Brazil."

The president denied he was interfering in the company, saying he was instead demanding greater predictability and transparency.

The appointment of Mr. Silva e Luna, announced by Mr. Bolsonaro Friday night on Facebook, must still be approved by the company's state-controlled board at a meeting scheduled for Tuesday. Many investors are betting the appointment will go through.

"I think they will approve it, if not this will weigh even more on the company," said Marco Saravalle, an investment strategist at São Paulo-based SaraInvest. A drawn-out conflict between the president and the board could cause even more losses at the company, he said.

As part of his efforts to win over the markets when he first took office in 2019, Mr. Bolsonaro appointed Roberto Castello Branco, a University of Chicago-educated economist, to the helm of Petrobras and promised to give him the freedom to set fuel prices based on the international oil market. Mr. Castello Branco's term ends March 20, but the board had been expected to renew it, analysts said.

However, when Petrobras said last Thursday it would raise the price of gasoline by almost 10% and the price of diesel fuel by almost 15%, Mr. Bolsonaro reacted with anger, warning that "something would have to change."

Truckers have also piled on the pressure, threatening to strike this month over fuel prices and paralyze Brazil, a country larger than the contiguous U.S. with few rail networks and thus heavily dependent on road transport. In 2018, truckers complaining about the high price of diesel fuel went on strike for 10 days, halting the flow of goods around the country, slamming the economy and leading to the resignation of the then-chief executive of Petrobras, Pedro Parente.

The nomination Friday came as a shock to both investors and many inside the company.

Mr. Castello Branco had won the market's trust after overseeing an ambitious plan to cut the company's debt load by selling noncore assets and by boosting production from the company's vast offshore oil deposits. The company's net debt fell to $66.2 billion at the end of the third quarter of last year, from $95.5 billion at the end of the first quarter of 2019, Mr. Castello Branco's first quarter in the job.

"The work he's been doing since starting there is very good, and we see this interruption as very bad, especially the way it's been done," said lan Arbetman, an analyst at the Brazilian firm Ativa Investimentos.

Despite pressure from the president to quit, Mr. Castello Branco intends to stay on in the job through the official end of his term in March, according to a person familiar with his thinking.

Mr. Silva e Luna briefly served as defense minister in 2018 and is currently the Brazilian director general of Itaipu Binacional, the Brazilian-Paraguayan agency that operates the Itaipu hydroelectric dam straddling the two countries.

As Mr. Bolsonaro has faced a series of crises since taking office in 2019, he has increasingly relied on loyal former members of the armed forces, especially those who -- like Mr. Silva e Luna -- trained at his alma mater, the Black Needles military academy in Rio de Janeiro.

After firing his first health minister Luiz Henrique Mandetta last year, only to have his replacement quit after several weeks, Mr. Bolsonaro appointed Eduardo Pazuello, another Black Needles army general to the post to handle the country's response to the pandemic.

Many public-health specialists have blamed the president for playing down the virus and failing to secure enough vaccines for the country of more than 210 million people.

Jeffrey T. Lewis contributed to this article.

Write to Samantha Pearson at samantha.pearson@wsj.com and Luciana Magalhaes at Luciana.Magalhaes@wsj.com

(END) Dow Jones Newswires

02-22-21 1757ET