(Updates with approval of budget bill)
By Marcela Ayres and Alonso Soto
BRASILIA, Dec 17 (Reuters) - The Brazilian Congress on Thursday approved a reduction in the country's fiscal savings target in the 2016 budget but ditched a request by President Dilma Rousseff for a steeper cut that raised questions about her commitment to close a widening deficit.
Most lawmakers in a joint session of Congress voted for a fixed target of 0.5 percent of gross domestic product (GDP) without the option of deducting investments and other expenditures. Lawmakers later approved the 2016 budget bill.
Rousseff on Tuesday proposed that option to reduce the target to zero if needed, meaning no savings. The government dropped plans to pursue its original goal of 0.7 percent of GDP to shield a popular social welfare program known as Bolsa Familia.
Rousseff had to backtrack a day later after lawmakers from her unruly alliance supported a smaller cut shortly after Fitch Ratings stripped Brazil of its investment grade rating, citing concerns over its fiscal health.
The decision is considered a partial victory for Finance Minister Joaquim Levy, a fiscal hawk widely respected on Wall Street, who repeatedly has opposed the reduction of the target.
His disagreements with Rousseff over the size of the surplus goal have fueled speculation that the former banking executive could leave the administration. His aides said if Levy decides to depart he would not do so immediately and instead wait until the government finds a replacement.
Levy has suffered a series of defeats and lost clout over policy decisions since he took office this year to implement an aggressive fiscal adjustment plan to head off a widening deficit that could reach 10 percent of GDP next year.
The rapid deterioration of fiscal accounts stemming from the deeper-than-expected recession and heavy public spending during Rousseff's first term is raising serious questions about the future of the country's finances.
Brazil's overall budget deficit, which includes interest payments, soared to 9.5 percent of GDP in October from 5 percent in the same month a year ago. That compares to a deficit of 4 percent in Mexico. (Writing by Alonso SotoChizu Nomiyama and Jeffrey Benkoe and Cynthia Osterman)