* Brazil to see prolonged tightening cycle - central bank
* Central bank sees wage increases as risk to inflation
* Some policymakers urged aggressive action to tame prices (Recasts first two paragraphs)
By Vanessa Stelzer and Luciana Lopez
SAO PAULO, April 28 (Reuters) - Brazil's central bank said interest rates will remain high for a long time as it grapples with strong inflation and it revealed growing concern about above-inflation wage deals.
Brazil's interest rates are already among the world's highest but a key inflation reading is now nearing a government ceiling and the fight against higher prices is dominating the early months of President Dilma Rousseff's administration.
With labor unions pushing for wage hikes above inflation, price pressures will likely remain a worry for some time.
Brazil's biggest economic boom in more than two decades has created a labor shortage that is driving up wages amid threats of strikes.
In minutes released Thursday of its April 20 meeting, the central bank's monetary policy committee (COPOM) said the economy faced an "important risk in the possibility of wage increases incompatible with production."
It added wage hikes could affect the "inflation dynamic."
The central bank last week raised its benchmark interest rate by 25 basis points to 12 percent to cool inflation.
That was less than the 50 basis points expected by most analysts, leading economists to worry the central bank, under new chief Alexandre Tombini, might be turning too dovish.
But the minutes of last week's meeting sounded more hawkish, sending up yields on short-term interest rate futures as investors bet borrowing costs would remain higher for longer than initially thought.
"This is a really tough document, maybe the most hawkish of the new central bank," said Jankiel Santos, the chief economist for Espirito Santo Investment bank in Sao Paulo.
"They're clearly signaling that they've rethought their policy strategy ... For anyone who thought there might be a pause at the next meeting, that's not what the bank signaled."
Last week, the COPOM said its seven members were split on the magnitude of the rate hike: five wanted a 25 bps hike while two wanted to raise rates by 50 bps.
The crack in the central bank's usually unanimous facade underscores the challenges for Brazil. The government wants to slow inflation without derailing the brisk growth that has boosted Brazil's status on the global economic stage and lifted millions into the middle class.
Already 12-month inflation has sped to 6.44 percent through mid-April. The central bank this year is targeting inflation of 4.5 percent, plus or minus 2 percentage points.
"The (monetary policy committee) understands unanimously that... the total adjustment to the benchmark interest rate, as of this meeting, should be sufficiently prolonged," the bank said in the minutes.
Under Tombini, the central bank has been reluctant to raise interest rates aggressively because that would likely boost the country's currency even further.
The real's 49 percent gains since 2008 have hurt Brazilian companies by making exports more expensive abroad and fueling a wave of cheap imports, especially from China.
Instead, the bank has signaled its reliance on so-called macroprudential tools such as reserve requirements, which limit how much banks can lend out. Economists have been split on the effectiveness of such measures, though.
SLOW AND STEADY WINS?
Yields on shorter-termed interest rate futures contracts rose after the minutes, as investors raised their bets for more interest rate hikes in the coming months.
But yields on longer-dated contracts dipped, with investors tempering their views for interest rates in 2013 and beyond.
Brazil is among a group of powerhouse emerging markets that have begun increasing interest rates to fight rising prices, even as many developed economies continue to struggle.
Chile's central bank this month raised interest rates by 50 basis points to 4.50 percent to hold back the local effects of rising commodity prices around the world. Policy-makers there said they see inflation returning to normal, in meeting minutes also released Thursday.
But Brazil's economic outlook remains particularly uncertain, with the central bank here noting imbalances between supply and demand and still-expanding credit.
As a result, said Silvio Campos Neto, an economist with Tendencias consultancy in Sao Paulo, "the bank prefers to go slowly, so they can weigh the effects of changes from meeting to meeting." (Additional reporting by Sao Paulo newsroom; editing by William Schomberg)