Investors fear the corruption allegations could paralyse Silva's administration.

Stocks fell for the second straight day over concerns about political stability in South America's largest country. Brazil's currency, the real, was down again against both the dollar and euro.

Addressing a United Nations forum in Brasilia on Tuesday night, Silva vowed to spare no effort in the fight against corruption.

"We won't protect anyone, we will cut into our own flesh if necessary," Silva told delegates at the opening of the four-day UN Global Forum on Fighting Corruption.

He also declared he had fired the directors of the postal service and the state-run IRB reinsurance company, but stopped short of announcing a wide-ranging anti-corruption package as many here had expected.

The firings followed the launch of a congressional probe into corruption in the postal service last week, and Monday's accusations by a senator in the governing coalition that Silva's Workers Party had paid monthly bribes to buy votes in Congress.

Congressional probe

Silva told the forum that his government was dedicated to thoroughly investigating all charges and would not oppose a congressional probe.

Before the speech, analysts said Silva had to explain what he knew about the payoffs in order to restore confidence in a party formed with a commitment to high ethical standards during Brazil's military dictatorship, when Silva was a renegade union leader.

"The crisis has now hit the president himself. People are asking: Did he know? and if he knew, Why didn't he act immediately?"

Alexandre Barros,
Political risk consultant

"The crisis has now hit the president himself," said Alexandre Barros of the Early Warning political risk consulting group in Brasilia. "People are asking: 'Did he know?' and if he knew, 'Why didn't he act immediately?"

Top congressional members from the Workers Party said Silva was informed about the alleged payoffs this year by Congressman Roberto Jefferson, the leader of the Brazilian Labour Party.

But they said little was done about it because Jefferson offered no proof.

The scandal emerged after Jefferson told the Folha de Sao Paulo newspaper that the Workers Party paid monthly "allowances" of more than $12,000 to unnamed congressional representatives so Silva could maintain a delicate coalition essential to pushing bills through Congress.

Investor concerns

After plunging 3% on Monday when the payoff story broke, shares on Sao Paulo's Bovespa exchange closed down another 2% on Tuesday.

Investors are particularly concerned that a congressional investigation would delay key Silva legislative initiatives including labour and tax reform and a proposal to grant the Central Bank more autonomy.

Lula says he is committed to
high ethical standards

Workers Party leader Jose Genoino denied for a second day in a row that the payments took place, but his remarks did not ease investor concerns.

"The financial markets are waiting for a stronger position from the government about these accusations and their ramifications," Sao Paulo's Lafis consulting firm told clients in a research note.

While some avowed Silva enemies called for his impeachment, analysts said it is unlikely that the congressional investigation would reach that point.

But they said the administration could be severely damaged if a probe uncovers records of the payments from the Workers Party to lawmakers.

"Right now you have no smoking gun, but the problem with these payoffs to deputies for votes is it's a lot of money, twice as much as they make regularly in salary and perks," said David Fleischer, a political science professor at the University of Brasilia.

Quick surgery

"A lot of people could be in hot water. Politicians are worried this could explode."

Delegates arriving for the UN anti-corruption event said Silva must act quickly to convince the world he can control corruption in Brazil.

"The financial markets are waiting for a stronger position from the government about these accusations and their ramifications"

Lafis consulting firm,
Sao Paulo

"Think of a doctor. What should he do for a case of cancer?" asked Marcin Walecki, a political science professor at Britain's Oxford University. "He will have to operate quickly to remove the tumour."

Silva could pre-empt damage to his party by proposing measures to fight corruption and scale back Brazil's extensive political patronage system, Fleischer said.

While that would mean firing tens of thousands of public servants, lawmakers would face "political suicide to go against it and say, 'I want to stay on the gravy train'", he said.

Silva is up for re-election next year, but the timing could have been worse. "He's got time now to get this behind him," Fleischer said.

Still, the scandal could give opposition leaders time to bolster their political power bases and challenge Silva.