QUITO (Reuters) - President Rafael Correa's default on Ecuador's sovereign bonds will help him win re-election next year, even though the aggressive move against investors could hurt the economy and eventually his popularity.

Despite having enough funds, Correa refused to make a $31 million interest payment on Ecuador's 2012 global bonds Monday, vowing to fight "monster" bond-holders in international courts to slash the value of debt he considers unfair and corrupt.

Correa, a socialist ally of Venezuelan President Hugo Chavez, has squeezed income out of oil, mining and telecommunications companies and ejected a major Brazilian builder from the small Andean country.

But the debt default, the first in Latin America since 2002, was Correa's toughest move against foreign investors in his almost two years in power.

Halting payments on $3.8 billion of Ecuador's global bonds will save Ecuador only $400 million in payments next year but will scare off investment and cut credit lines into the country just as income from its economic mainstay, oil, plummets.

Still, by following through on threats he made even before he took office, Correa burnishes his image among Ecuadoreans as a gutsy leader fighting greedy foreign investors.

"Ecuadoreans know little about debt, but they know that it is a big burden the country has been carrying for decades," said Carlos Cordova, a pollster with Cedatos-Gallup in Quito. "Definitely, his popularity will rise, but we need to closely monitor the economy before April's election."

Elected in late 2006, Correa has since pulverized the opposition in national votes, including one that changed the constitution top give him wider powers and set up a new election for April.

Correa has been the clear favorite to win the presidential vote and his chances are boosted further by the popularity of his default.

"I really don't know the details of the debt, but I trust Correa," said Rafael Gomez, a security guard in Quito's ritzy business district. "If he is not paying the debt to give more money to the poor, I'm all for it."

But the economic backlash predicted by most Wall Street economists could erode his popularity if Ecuadoreans start to feel the pinch and then blame him for being too bold.

Ecuadoreans have a habit of ousting elected presidents when the economy sours. Three of Correa's predecessors were toppled in street protests in the decade before he swept to office campaigning as a political outsider.

Correa is sensitive to those risks. "If this costs the country too much then the country has to decide if I should continue as president," he said last week after he announced the default.

CRISIS MODE

A former senior official who had been involved in economic policy-making under Correa said the move exposed his hubris.

"Correa is going too fast with his revolution and that will cost him greatly. No president has ever survived a default ... His fall will be faster than his rise to power."

But Correa could avert an economic crisis in the next few months with ample oil cash reserves left from record-high prices earlier this year. He has also shielded his government by securing a $1 billion credit line just before he defaulted from the Andean Development Bank -- a multilateral lender headquartered in Venezuela.

The default will for years limit credit from international markets to his government and the private sector, hurting economic output and boosting unemployment in an economy that is already struggling. Potential lawsuits seeking the seizure of Ecuador's oil cargoes could also risk revenues.

A U.S-trained economist, Correa has helped Ecuadoreans with increased subsidies even as the economy has sputtered.

Low growth and high inflation compounded by a drop of $100 a barrel for world crude prices since July and the government's failure to hit its oil output targets already made for a gloomy outlook before the default.

Correa, who uses a slogan "life before debt" to explain his priorities, has already warned the global financial crisis could force him to cut social spending on the majority poor.

Foreign investment is expected to plummet as investors' mistrust in Correa curtails financing to the key oil and mining industries that need billions of dollars for key projects. "The decision to default coupled with a mix of nationalist, inward-looking, heterodox policies is likely to lead to sub par economic performance in coming years," said Alberto Ramos, a senior economist at Goldman Sachs. (Reporting by Alonso Soto; Editing by Saul Hudson and Kieran Murray)