(Adds Meirelles comments, context)
By Maria Carolina Marcello and Alonso Soto
BRASILIA, Dec 20 (Reuters) - Brazil's lower house of Congress on Tuesday removed many of the fiscal austerity commitments that cash-strapped states had agreed to in exchange for debt relief, once again derailing government efforts to enforce fiscal discipline in states.
The lower house passed a bill that allows states in the worst financial conditions to halt debt payments and rework commitments with the federal government and service providers.
However, it removed measures imposed by President Michel Temer to force states to increase pension charges on employees and forbid local governments from raising wages and creating new jobs. The bill now heads to the president for his signature.
The defeat puts into question Temer's political support in Congress to approve other unpopular reforms to rebalance the country's fiscal accounts and help rescue the economy from a recession that threatens to stretch into a third year.
The legislation also reduces debt payments and extends the maturity on 427 billion reais ($127 billion) of debt owed by all of the 27 states.
"It was not possible to keep the bill exactly as the finance ministry wanted," said Rodrigo Maia, the head of the lower house and an ally of Temer. "The states will get benefits, but they will also have to limit their expenditures for two years."
Lawmakers did keep a provision that limits states' spending by the rate of inflation for two years, much less than the 20 years for the federal government in a similar amendment approved by Congress last week.
Finance Minister Henrique Meirelles said Temer could veto part of the bill and that the government would have the last word on states' "fiscal recovery" requests to rework their debts.
Time and time again Temer and Meirelles have had to backtrack on efforts to increase fiscal rigor in states now struggling to pay workers and honor their debts.
Temer, weakened politically by a government corruption scandal, this week agreed to release more than 10 billion reais from an amnesty asset program to states and municipalities even after they scrapped his plan to impose wage freezes in exchange for the money. The move came after states filed a lawsuit to force the government to share the money. (Reporting by Maria Carolina Marcello; Writing by Alonso Soto; Editing by Alistair Bell and Andrew Hay)