June 24, 2005 - 3:50 AM

Brazil's Lula fights scandal probes

By Andrew Hay

BRASILIA, Brazil (Reuters) - Brazilian President Luiz Inacio Lula da Silva vigorously defended his coalition government on Thursday against corruption allegations that have paralyzed his administration.

"This government has not swept dirt under the rug," the former union leader said in a prepared televised address. He said corruption would be punished with "all of the force of the law."

"If any government has been exemplary in the combat against corruption, since the first day, it is my government," said Lula, who took office in 2003 with promises to root out graft.

The bribery scandal, centered on allegations his Workers' Party paid legislators for their support, has already claimed one top aide.

Cabinet chief Jose Dirceu resigned last week and a further cabinet reshuffle is expected in the coming days.

Lula is expected to replace Political Coordination Minister Aldo Rebelo, his lead liaison with Congress, three government sources said on Thursday.

Rebelo, however, told Reuters: "I continue as minister until President Lula says so."

Lula needs to shore up his legislative support to contain Congressional inquiries that could weaken him before next year's presidential election. Many analysts regard Rebelo as ineffective.

Jacques Wagner, an old friend of Lula's and head of the government's economic and social development council, would be most likely to take over Rebelo's duties, two sources said.

Three investigations looking at different angles of the scandal got underway this week. But Congressional leaders agreed on Thursday to hold off on creating four other inquiries that could have entirely halted legislative voting.

"We reached an agreement between leaders to evaluate the chances of installing more (congressional inquiries) at the moment," said Aloizio Mercadante, the government's Senate leader.

The most damaging allegations came earlier this month when lower house Deputy Roberto Jefferson accused the Workers' Party of using funds from state firms to pay lawmakers for votes.

Government ministers and Workers' Party officials have denied any wrongdoing. Jefferson, the former head of a party in Lula's coalition, has presented no evidence.

Dirceu became the first high-level victim of the scandal last week when he stepped down to retake his seat in Congress. His impassioned defense of the government on Wednesday led to a scuffle that forced the house to shut down.

Lula's government needs the support of seven leading parties to pass its legislation. Investors fear economic reforms could be doomed if the coalition crumbles.

(Additional reporting by Terry Wade in Sao Paulo, Tiago Pariz, Natuza Nery and Ricardo Amaral in Brasilia)