(Adds BNDES statement, Ecuador minister in paragraphs 8-9, 12-14)

By Inae Riveras

SAO PAULO (Reuters) - Brazil recalled its ambassador from Ecuador Friday, escalating a diplomatic dispute over the Andean country's move to suspend payments on a $320 million Brazilian loan.

The row over the loan from Brazil's state development bank is fraying Ecuador's ties with Brazil, the region's main economic and diplomatic power, as the global economic crisis hits the price of oil that is a mainstay of Ecuador's economy.

"The Brazilian government has received with serious concern the news of the Ecuadorean government's decision to file suit ... to seek a suspension of payments on its debt with the BNDES," Brazil's Foreign Ministry said in a statement.

Brazilian Foreign Minister Celso Amorim warned previously that if Ecuador defaulted on a loan from BNDES, as Brazil's national development bank is known, it would end trade between the two South American nations.

"Whoever knows diplomatic practices knows exactly what this (recall) means," Amorim said at a biofuels conference in Sao Paulo Friday.

"We have wide cooperation with Ecuador and we will examine this cooperation in light of these decisions."

Ecuador filed an international lawsuit Thursday to suspend payments on the loan from the BNDES, alleging the terms were unlawful.

BNDES said in a statement the loan contract signed in 2000 met all requirements of Brazilian and Ecuadorean law and was approved by Ecuador's Congress, central bank and chief public prosecutor.

"Nonpayment implies default by the debtor central bank," BNDES said.

Ecuadorean President Rafael Correa raised the specter of default by warning he may not repay "illegitimate" debt as oil export revenues have been hurt by falling prices and the global financial crisis.

Correa said the results of a yearlong audit of Ecuador's debt found indications of illegitimacy in much of the country's $10 billion foreign debt, including its 2012, 2015 and 2030 Global bonds and multilateral loans.

A senior Ecuadorean official tried to downplay the standoff later Friday.

"We hope that this will not affect the cordial and friendly ties between Ecuador and Brazil," Minister of Politics Ricardo Patino said.

"Our government has taken a sovereign decision," Patino said.

A popular leftist, Correa has often threatened measures against debt holders as part of a campaign to shore up state control of the economy and key industries, such as oil and mining, which he says have been ravaged by foreign investors.

Seen by Wall Street credit rating agencies as among the least credit-worthy countries in Latin America, Ecuador last defaulted in 1999 on $5.8 billion in bonds, also during a sharp fall in oil prices. (Additional reporting by Alonso Soto in Quito) (Writing by Raymond Colitt; Editing by Peter Cooney) (stuart.grudings@thomsonreuters.com; +55 21 2223-7149; Reuters Messaging: stuart.grudgings.reuters.com@reuters.net))