President Lula da Silva has vowed to fight Brazilian corruption

The benchmark Bovespa index lost 2.1% on Tuesday after sliding 3% on Monday.

A denial by the governing Workers Party (PT) that it paid to gain support in parliament did little to help shares.

The allegation was made in a newspaper interview by Roberto Jefferson, president of ruling coalition member the Brazilian Labour Party.

The Bovespa dipped below the key 25,000 market before recovering slightly to close at 25,026.10.

Backhanders?

Mr Jefferson said his MPs refused the offer of monthly payments in 2003, but claimed that other parties accepted bribes of up to $12,000 (�6,540) in return for political loyalty.

Speaking to the Folha de Sao Paulo newspaper, Mr Jefferson said that the payments only stopped when he took the matter to President Lula da Silva himself.

The PT countered that the allegations do not contain "a grain of truth".

Many investors are concerned that there may still be revelations in what is the first corruption scandal to hit President Lula da Silva's government.

"It is still too early to anticipate the magnitude of this political scandal, but we think it probable that it will constitute the main focus of media headlines in coming days and perhaps weeks," investment bank UBS said in a note to investors.

Consulting firm Lafis said that "financial markets are waiting for a stronger position from the government about these accusations and their ramifications".

Policymakers were debating Tuesday about whether to open a congressional investigation into Mr Jefferson's allegations.