(Adds Temer, analyst and lawmaker comments)
By Maria Carolina Marcello and Alonso Soto
BRASILIA, June 20 (Reuters) - A Brazilian Senate committee on Tuesday rejected President Michel Temer's labor reform bill, in an unexpected blow to his administration that does not kill the pro-market proposal but shows weakening support for his agenda.
Even after being rejected in the social affairs committee by 10 to 9 votes, the proposal moves to the constitutional and justice committee before its heads to the floor for a full vote, said Ricardo Ferraco, the senator drafting the bill. Ferraco said he expected the bill to be approved by late June.
The surprise setback shows corruption allegations against Temer have eroded congressional support to approve his austerity reforms which are considered key to pulling the economy out of its worst crisis in decades.
"The labor reform can still be approved, but this defeat shows the government will have a really hard time to approve its landmark pension reform," said Juan Jensen, a partner with Sao Paulo-based 4E Consultoria.
"This reaffirms our vision that the pension reform will be rejected or diluted beyond recognition," he added.
Brazilian assets tumbled after the reversal, revealing investors' concerns with Temer's capacity to plug a widening fiscal deficit that has cost Brazil its coveted investment-grade rating.
Temer, who took office last year after the impeachment of leftist Dilma Rousseff, is under investigation over allegations he took millions of dollars in bribes from the world's largest meatpacking company, JBS SA. Temer has denied any wrongdoing.
His main ally in Congress, the Brazilian Social Democratic Party, has said they will break away from his coalition if Temer fails to approve the labor and pension reforms.
Speaking to reporters in Russia, Temer downplayed the setback, saying he is confident the Senate floor will approve the proposal in coming weeks.
For final approval, the labor reform just needs a simple majority on the Senate floor.
On the other hand, the controversial pension proposal, which sets a minimum age of retirement and cuts retirement benefits, needs three-fifths of the votes in both the senate and the lower house to be approved. (Reporting by Maria Carolina Marcello; Writing by Alonso Soto; Editing by W Simon and James Dalgleish)