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Brazilian presidential Chief of Staff Antonio Palocci attends a ceremony in which President Dilma Rousseff announced the inclusion of diabetes and hypertension drugs as part of their program to provide medicine to the poor, in Brasilia February 3, 2011. REUTERS/Ueslei Marcelino


By Pedro Fonseca

RIO DE JANEIRO (Reuters) - Brazilian police on Monday arrested Antonio Palocci, a former finance minister and presidential chief of staff in recent Workers Party governments, as a sweeping anti-corruption probe reached ever closer to the heart of the left-leaning party.

Prosecutors said in a statement on Monday that Palocci acted as a liaison between the Workers Party and Latin America's largest engineering and construction conglomerate, Odebrecht SA [ODBES.UL], between 2006 and 2013 in a political kickback scheme centred on contracts at state-led oil company Petroleo Brasileiro SA, or Petrobras.

Palocci was former president Luiz Inacio Lula da Silva's finance minister and chief of staff to ex-president Dilma Rousseff, who was ousted in August in an impeachment trial that ended 13 years of Workers Party rule.

His lawyer did not immediately respond to requests for comment.

Palocci's arrest brings the investigation of Brazil's biggest ever corruption scandal into the core leadership of the Workers Party. Last week, police briefly arrested Guido Mantega, who succeeded Palocci as Lula's finance minister and stayed in the post for almost nine years.

Mantega had been arrested on a temporary detention warrant and was released after a few hours in custody. Palocci was picked up on the same warrant, which could mean his detention will also be brief.

"This is another nail in the Workers Party coffin," said Andre Cesar, a political analyst at Brasilia-based public policy consultancy Hold Legislative Advisors. "The circle is closing. After Mantega and Palocci, it is almost inevitable that they will get to Lula, and it could come soon."

Lula was indicted last week on corruption charges in a case involving a luxury seaside apartment that prosecutors says was a disguised bribe from a construction company implicated in the Petrobras scheme. Still Brazil's most popular politician, his arrest is unlikely before he goes on trial.

Investigators allege Palocci improperly approved loans from state development bank BNDES to Odebrecht in Africa and for oil platforms. They also allege that he pushed legislation through Congress to help the company win tax advantages.

Prosecutors said they had found evidence that Odebrecht paid 128 million reais (£30.5 million) to the Workers Party and its representatives between 2008 and 2013, including Palocci.

Construction magnate Marcelo Odebrecht, whose family owns the group, received a 19-year sentence in March for bribery, money laundering and organised crime in relation to the scandal at Petrobras.

Two other people were arrested in Monday's raids, both former aides of Palocci.

Odebrecht's press office said the company would not comment. BNDES officials did not immediately respond to a request for comment.

Palocci led the drive to persuade investors before Lula's election that Brazil's first working class president was market-friendly. As finance minister starting in 2003, he continued the anti-inflation policies of the previous government, helping calm market concerns.

He resigned in 2006 in the face of allegations he lied to congress about his presence at a mansion used by lobbyists in the capital Brasilia, where political graft was alleged to have been negotiated.

When Rousseff succeeded Lula in 2011, Palocci became her chief of staff but ended up stepping down again in the face of accusations that his personal finances were not consistent with his government salary.

A medical doctor by training, he was a leading confidante and power broker in both the Lula and Rousseff governments and a senior campaign official for the Workers Party.

Rousseff was succeeded by her vice-president Michel Temer.

(Reporting by Pedro Fonseca Additional reporting by Anthony Boadle in Brasilia; Writing by Jeb Blount; Editing by Daniel Flynn and W Simon)


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