Presidential Chief of Staff Eliseu Padilha said the government is unwilling to further water down the controversial bill, after repeatedly doing so in order to garner lawmaker support.
His remarks worried traders who feared President Michel Temer's administration will not manage to get enough votes with the measure, which they see as critical to boosting long-term economic growth, as it stands.
"The market read this as a sign that the government has no resources left to convince lawmakers to vote for the plan," said a trader at a S?o Paulo-based brokerage.
The current version of the pension reform plan would generate fiscal savings of around 60 percent of the government's original proposal.
Brazil's benchmark Bovespa stock index fell 1.3 percent, leading losses among equity markets in Latin America on declines in blue-chips such as lenders Ita? Unibanco Holding SA , Bradesco SA and state-controlled oil company Petr?leo Brasileiro SA.
The Brazilian real slipped 0.3 percent, in line with similar moves in the Chilean and Colombian pesos .
Strong US third-quarter economic growth data and signs of progress in US Republicans' efforts to get a tax bill passed fueled expectations of inflationary pressure in the United States which could force the Federal Reserve to hike interest rates.
Higher rates could dampen demand for emerging market currencies, which typically lure foreign investors with high yields.