Brazil's stocks slumped on Friday on worries a government bribes scandal would widen to implicate Finance Minister Antonio Palocci, who is President Luiz Inacio Lula da Silva's top economic adviser and a favourite of investors.
The Bovespa index of the Sao Paulo Stock Exchange slumped as much as 2.75 percent but retraced some ground to end 0.95 percent down at a preliminary close of 26,643 points.
Nearly all stocks fell, but iron ore miner CVRD rose 1.1 percent to 69.50 reais on news German steelmaker ThyssenKrupp will build a steel plant in Brazil.
News reports that linked Palocci to a bribes scheme when he was a mayor of the Sao Paulo state city of Ribeirao Preto caused the selling, traders said.
Friday marked the first time since the congressional bribes-for-votes and campaign finance scandal broke in June that a member of Lula's economic team was tied to it.
Fears were stoked that the persuasive defender of tight spending and inflation controls might lose sway in Lula's diverse coalition.
"This changed everything," Luiz Roberto Monteiro, investment analyst at the Souza Barros brokerage in Sao Paulo said of the reports about Palocci.
"This stressed the market immediately," said Flavio Ogoshi, a derivatives trader at Rabobank in Sao Paulo.
Palocci's mayoral administration allegedly received the monthly bribes from a company in exchange for sanitation contracts, a former aide to Palocci, Rogerio Buratti, said on Friday during a series of depositions he has given in recent days.
Part of the cash was allegedly delivered to the headquarters of the Workers' Party.
"He (Buratti) said this. It's in his deposition," Sebastiao Sergio da Silveira, a government lawyer, told reporters.
Palocci, in a statement, said he "vehemently denied" the accusations by his former aide, who made the allegations to try and strike a plea bargain with prosecutors in a corruption case.
Palocci quit his mayoral post to join Lula's government, which took office in January 2003.
Lula has battled allegations his top aides and former officials of the ruling party bought votes in Congress, but has acknowledged some of the party's campaigns were improperly financed.
The real closed 2.8 percent weaker at 2.45 per dollar to post its biggest one-day loss since May 2004. Nonetheless, booming exports and high domestic interest rates are keeping it near 40-month highs.