After take off from Sao Paulo Guarulhos Airport (GRU), the flight crew of a Varig Boeing 737 reported experiencing a strong engine stall on the No. 1 engine, a General Electric CFM56-3 engine followed by high vibrations during the climb out phase of flight. Crewmembers and passenger reported a flame coming out of the No. 1 engine during the reported engine stall. Pilot performed an in-flight shutdown of the No. 1 engine and reported no No.1 engine fire warnings were annunciated or illuminated. Pilot performed an air turn back to GRU airport for an uneventful landing. After landing VARIG inspectors reported severe fan blade damage with several blades fractured near the fan mid span shroud, heavy impact damage to the fan inlet case and holes in the inlet cowling.

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