The secret service agent, named as William Peter Goodall, is on the run after entering the country using a false passport and is alleged to have illegally monitored the emails of a government minister before the Workers' party took power in 2003.
Police have already detained a Portuguese man, Tiago Verdial, who was taken from his home in Rio de Janeiro to a jail in the capital Brasilia under accusations of spying.
Both men were sub-contracted by Kroll, an international risk consultancy company that was hired by Brasil Telecom to investigate supposed irregularities by rival Telecom Italia. Kroll denies all the allegations.
Police had planned to wait until Goodall, head of Project Tokyo, was back in Brazil and arrest both men at the same time but were forced to act swiftly after documents published by the Folha de Sao Paulo newspaper ignited the crisis.
"He [Goodall] was my boss. I reported to him," Verdial says in telephone recordings leaked to the local press.
Goodall has done a vanishing act to make James Bond jealous. His whereabouts are unknown.
But there is an extraordinary insight emerging into the life and character of Verdial. He was a member of a new internet craze that has swept Brazil, orkut.com, the social network created by Google.
Each member has a page with their name, profile, photograph and friends, a network of people they know in real life. There are thousands of communities devoted to special interests. Membership is achieved if another member invites the newcomer and invites are sold on the net auction site eBay for $1.
"Tiago was born in Portugal but he is Brazilian of blood and soul. He is a famous little fish, which are usually crucified in these types of stories"
Anonymous website message
on Tiago Verdial
On his page, Verdial, 30, portrays himself as the real party animal, a samba and football fan. Photos on the network of 167 of his friends are full of beach scenes, smiles and parties in the neighbourhood of Urca in the shadow of the famous Sugar Loaf mountain in Rio de Janeiro.
His groups include users with nicknames such as Stanley Kubrick, Portugal and Alcoholics Get-together.
Facing a possible 12-year sentence for corporate espionage, a community and a website have sprung up in his defence.
"I've just come off the phone with Tiago [from his prison cell]," writes Tata. "He laughed lots when I told him there was a community devoted to him on Orkut."
"Tiago was born in Portugal but he is Brazilian of blood and soul. He supports the Brazilian football team! He is a famous little fish, which are usually crucified in these types of stories. He isn't rich and doesn't have this glamorous life of a spy, which has become his image in the media. He rents his house and doesn't have a car," writes someone anonymously on the website.
Communications Minister Luiz
Gushiken says he was spied on
Verdial relayed this message back: "I want to say that you are all giving me strength at this time and it's this that I need. I want you to know that thinking and fighting for me is what keeps me going and leaves me happy."
Luiz Gushiken, the government communications minister and the most prominent figure who was allegedly spied on, has been a close personal friend of Brazilian President Luiz Inacio Lula da Silva for 35 years.
Gushiken called the apparent investigations by Verdial and Goodall as "sordid and illegal". He said: "The courts will adequately deal with this issue."
President Lula said: "You can be sure that the moment we discover, with concrete proof, illegal investigations, the persons behind them will be detained and charged under the rule of law."
And that is a law that is set to change under proposals, as a reaction to the case, to restrict the tapping of telephones and monitoring of emails subject to a four-year prison sentence.
The current head of the Banco do Brasil, Cassio Casseb, was also allegedly monitored. He said he felt "violated".
The spy case has sent shockwaves through the government and comes after claims that the Brazilian parliament was bugged by the US in a magazine interview with the former head of the Brazilian FBI, Carlos Costa, in March.