(Recasts for Juca stepping down to return to Senate, adds comments, market reaction)
By Silvio Cascione and Maria Carolina Marcello
BRASILIA May 23 Brazil's interim government was rocked on Monday by the loss of one of its key figures, Planning Minister Romero Juca, who stepped aside amid accusations he had conspired to obstruct the country's biggest-ever corruption investigation.
Interim President Michel Temer was counting on Juca, a close confidant and experienced senator, to steer a budget bill through Congress to avoid a government shutdown next month.
However, a recording of his conversation with a suspect in the investigation threatened to stain the new, center-right administration, already unsettled by a series of policy reversals during its first week in office.
The scandal weakened Brazil's currency on fears of further instability less than two weeks after President Dilma Rousseff was suspended to stand trial in the Senate for allegedly breaking fiscal laws, leaving former Vice President Temer to lead the country.
"Starting from tomorrow, I will step aside," Juca, appointed by Temer after Rousseff's suspension, told reporters in Brasilia. He denied any wrongdoing and insisted that his recorded comments had been distorted and taken out of context.
In the recording, made before Rousseff was put on trial and published by newspaper Folha de S. Paulo on Monday, Juca told a friend he agreed on the need for a "national pact" to limit the graft probe rattling the political establishment.
Asked for help by his ally, ex-senator Sergio Machado under investigation in the probe, Juca replied: "The government has to be changed in order to stop this bleeding," Folha reported, adding that the conversations were taped "secretly."
Juca said the conversation happened either at his home or at his office but it was not clear how the hour-long recording was made. Local media reported it may be connected with Machado who has been negotiating a plea bargain deal with prosecutors. Machado was not immediately available for comment.
Juca and other ministers in Temer's new government are under investigation for their alleged roles in the massive bribery scheme stemming from state-run oil company Petrobras.
At a press conference earlier on Monday, Juca insisted that he would never interfere in the investigation and his comments were not incriminating in any way. He said the "bleeding" he was referring to was Brazil's free-falling economy and the Rousseff government's recent paralysis.
By the end of the day, however, the scandal had reached a fever pitch in the capital Brasilia, and Juca announced his plans to take a leave of absence from the ministry until public prosecutors make public statements exonerating him.
Brazil's benchmark Bovespa stock index was knocked lower by the news, falling 0.8 percent on Monday. The local currency lost 1.8 percent against the U.S. dollar.
Temer said in a statement that Juca would support the government from the Senate to ensure that the budget and other reforms were passed.
A trained economist with over 20 years in the Senate, Juca was a key member of Temer's new economic team that is racing to approve a series of economic measures in Congress aimed at rescuing investor confidence in the slumping Brazilian economy.
New Finance Minister Henrique Meirelles will announce on Tuesday some of those measures to include limits to public spending to close a widening fiscal gap that cost Brazil its coveted investment-grade rating.
EARLY BACKLASH
The blow of Juca's leave of absence followed a political about-face over the weekend, when Temer reinstated the culture ministry just over a week after announcing he was folding it into the education ministry to save money.
The decision to combine the ministries provoked the ire of famous artists and musicians, adding to a backlash against the interim government last week that included protests outside Temer's Sao Paulo residence.
Eliane Cantanhede, a seasoned political columnist, wrote Monday on the website of the Estado de S.Paulo newspaper that tossing Juca overboard was the only option for Temer, but that it will not solve the interim president's political problems.
"Juca is gone, but the trail of the recordings remain ... and will serve as the fuel to further ignite the movements that will take to the streets against Temer," she wrote.
Federal police in the southern city of Curitiba have spearheaded the Petrobras probe with broad popular support.
They said on Monday they had no direct knowledge of the Juca recording but were not concerned about his reported remarks.
"From everything we have seen so far, it's extremely clear that (the investigation) has not and will not be blocked by anyone," said Igor Romario, a lead investigator on the case.
Sergio Moro, the federal judge who has overseen much of the Petrobras case, said at a public event in Sao Paulo that he would not comment specifically on the Juca recording.
But he said "the judiciary has demonstrated its independence in relation to the other powers and to any political interferences." (Additional reporting by Caroline Stauffer and Brad Brooks; Writing Brad Haynes and Alonso Soto; Editing by Daniel Flynn and Andrew Hay)
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