BUENOS AIRES, May 23 (RIA Novosti) - Argentina and Brazil, South America's two largest economies, will drop the U.S. dollar in favor of a regional currency in their bilateral trade starting in October 2007, Argentine Economics Minister Felisa Miceli said.

The countries' transition to a new currency, as yet unnamed, is part of a pilot project by the South American continent's major trade alliance, Mercosur, to replace the U.S. currency in internal transactions with money of its own, Miceli said.

Speaking ahead of a Mercosur ministerial session in Paraguay, she said the new currency should eventually spread throughout the bloc, which also includes Paraguay, Uruguay, and Venezuela.

Bolivia, Chile, Colombia, Ecuador and Peru have associate member status.

Argentine-Brazilian commerce topped $20 billion in 2006, with Argentina running a deficit of $4 billion.

Since its foundation in 1991, Mercosur's primary objective has been to remove obstacles to internal trade. But the recent admission of Venezuela made experts wonder whether the country's anti-American leader, Hugo Chavez, would try to turn Mercosur into a political weapon to undermine U.S. influence in the region.