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Brazil's President Dilma Rousseff reacts during a launch ceremony of Agricultural and Livestock Plan for 2016/2017, at the Planalto Palace in Brasilia, Brazil May 4, 2016. REUTERS/Ueslei Marcelino

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By Anthony Boadle and Maria Carolina Marcello

BRASILIA (Reuters) - Brazilian President Dilma Rousseff's chances of remaining in office plummeted on Wednesday after a key senator recommended the leftist leader face an impeachment trial and a top prosecutor said she should be included in a vast corruption investigation.

Rousseff, whose popularity has fallen in the last year due in large part to a deepening economic recession, is expected to become the first Brazilian president to fail to complete a presidential term in more than 20 years.

Senator Antonio Anastasia, an opposition member tasked with recommending whether to put Rousseff on trial in the Senate for breaking budget laws, told a 21-member Senate committee that the charges were serious enough to remove her from office.

The committee is expected to vote overwhelmingly on Friday to send his recommendation to the full chamber.

"We are looking at a complaint centred on evidence of irregularities that can put fiscal responsibility at risk," Anastasia, a member of the Brazilian Social Democracy Party (PSDB), told the committee.

The Senate, which is controlled by the opposition, is due to vote on May 11 on whether to try Rousseff, at which point she will be automatically suspended during a trial that could last up to 180 days. Vice President Michel Temer would take over as acting president.

Anastasia's recommendation came after Brazil's Prosecutor General Rodrigo Janot requested that Rousseff be investigated for obstruction of justice in connection with a vast corruption probe involving state-run oil firm Petroleo Brasileiro SA, or Petrobras <PETR4.SA>.

It is the first time she has been officially accused of involvement in the bribery and political kickbacks scandal.

Rousseff said the accusation was based on outright lies by a former senator in her ruling Workers Party.

"If an investigation is opened I am sure it will show that Senator Delcidio do Amaral was lying once again," Rousseff told reporters.

According to documents made public on Tuesday, Janot asked the Supreme Court to authorise an investigation of Rousseff and Luiz Inacio Lula da Silva, who is her predecessor and the founder of the Workers Party.

While Rousseff is not being investigated for taking bribes herself, the obstruction of justice probe, if allowed by the Supreme Court, will further undermine her ability to defend against her removal from office by the Senate.

Temer, who is already forming a transitional government, would serve out the remainder of Rousseff's term through 2018 if she is convicted of manipulating public accounts and removed definitively from office.

In a move that would have helped Rousseff if it had come earlier, the Supreme Court will decide on Thursday whether her nemesis, the Speaker of the lower house of Congress Eduardo Cunha, should be removed due to corruption charges he faces.

Cunha launched impeachment proceedings against Rousseff.

ECONOMIC CRISIS

The political crisis has paralysed Brazil's government and halted efforts to pull the country out of its worst recession since the 1930s as it scrambles to prepare to host the Summer Olympic Games in Rio de Janeiro in August.

Despite the gridlock caused by the impeachment crisis, Rousseff said there are signs of an economic recovery underway.

Although the economy is expected to contract nearly 4 percent for a second straight year in 2016, economists say industries have already sharply reduced inventories and a weaker currency could help boost exports.

Brazilian markets have been buoyed for weeks by the prospect of Rousseff's ouster and the emergence of a more business-friendly government led by Temer, who has vowed to restore confidence and growth to Latin America's largest economy.

Fitch rating agency said on Wednesday that Brazil has a long road ahead to win back the investment-grade credit rating that it lost last year due to the fiscal crisis.

That path could be shortened if the political environment improves and consistent economic policies are adopted, Fitch's Brazil director, Rafael Guedes, told investors in Sao Paulo.

In a sign that Temer plans to reduce state involvement in the economy and boost private business, one of his closest aides told Reuters that a Temer government would consider allowing foreign owners to acquire a controlling stake in local airlines.

(Writing by Anthony Boadle and Caroline Stauffer; Editing by Paul Simao and Alistair Bell)

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