General Motors unveiled plans on Wednesday to spend about $1 billion in Brazil through 2012 to develop a new family of vehicles for South America, a priority market for the U.S. automaker as it looks to rebound from bankruptcy protection.

GM plans to invest the bulk of the money at its Gravatai factory in the southern state of Rio Grande do Sul, which it will expand to increase production capacity, Jaime Ardila, GM's chief executive for Brazil and the Mercosur region of South America, said in a statement.

The investment, which in Brazilian currency amounts to 2 billion reais ($1.02 billion), is part of a $2.5 billion spending plan spanning 2007 through 2012 in the Mercosur region that includes Brazil, Argentina, Uruguay and Paraguay.

GM made the announcement after Ardila met in Brasilia with President Luiz Inacio Lula da Silva, a former metalworker who cut his political teeth in the late 1970s as a union leader representing auto workers in Sao Paulo's industrial hub.

The plan calls for spending 1.4 billion reais to develop two new compact models under the Chevrolet brand and boost production at GM's Gravatai plant to 380,000 vehicles a year, three times its current capacity.

The remaining 600 million reais will be spent at GM's operations elsewhere in Brazil, the company said in a statement without elaborating.

GM said it plans to use cash flow from South America to fund a large part of the investment plan. It has already secured a credit line of 344 million reais from local bank Banrisul, and is in talks with two other Brazilian banks, including state development bank BNDES.

Brazil, Latin America's largest country, has emerged as a crucial market for GM in recent years thanks to a healthy economy and burgeoning credit market that have allowed millions of Brazilians to buy cars for the first time.

The U.S. automaker had its best year ever in Brazil in 2008 and is making a profit so far in 2009 despite an economic slowdown that has forced manufacturers to cut costs, Ardila said on June 2.

GM emerged from bankruptcy protection in the United States last week as a much leaner automaker after selling key operations to a new company majority-owned by the U.S. government. The restructuring gave the U.S. Treasury a 60 percent stake in the new GM.

($1=1.95 reais)

(Reporting by Ana Nicolaci da Costa, Writing by Todd Benson, editing by Matthew Lewis)