The fresh allegations are hurting investor confidence

Early on Friday Sao Paulo's Bovespa exchange was down 4%, taking the week's falls to 10%, while the real fell 1.8%.

The cause was evidence that a senior aide in the Workers Party (PT)had met a gambling boss from whom he took bribes after the PT's election in 2002.

But promises from President Luis Inacio Lula da Silva of an in-depth inquiry calmed nerves, sending stocks back into positive territory, ending 1.8% higher.

The day's gyrations are partly the result of the long Carnival holiday weekend ahead, with investors trying to make sure any further allegations do not catch them out.

But observers said more falls could come if the promised inquiry fails to look genuine.

Uncertainty

The allegations have been hitting the PT and its leader, President Luiz Inacio Lula da Silva, in their most prized electoral asset: a clean reputation.

Diniz is alleged to have taken bribes from a racketeer

As soon as the scandal broke a week earlier, the PT had taken action by firing Waldomiro Diniz from his job as aide to Lula's chief of staff, Jose Dirceu.

It is also now thinking of banning the gambling halls which play host to the "numbers game", a Brazilian form of street bingo based on animal names which is hugely lucrative for those who run it.

Carlos Ramos or "Carlinhos the Waterfall" - the man from whom Mr Diniz is accused of taking money for favours while head of the Rio de Janeiro state lottery - is thought to be a kingpin of the Rio numbers game.

But the new evidence published in weekly magazine Epoca, which broke the original story, could threaten Mr Dirceu's position too.

He is widely seen as the engine behind many of the party's reforms, and the possibility of his departure and the consequent uncertainty scared investors.