By Karima Anjani

JAKARTA (Reuters)- The multimillion-dollar project in Indonesia's remote West Papua province had noble ambitions: resettle migrant workers so they can forge a better life in one of the world's most populous countries.

But after thousands of dollars in bribes were found stuffed in a fruit box at the Manpower Ministry, the project has become a symbol of President Susilo Bambang Yudhoyono's struggle to deliver the "shock therapy" he promised in 2004 to rid Southeast Asia's biggest economy of endemic graft.

It now threatens to bring down members of his cabinet and could damage his own Democrat Party.

With a population of 238 million and swelling investment, Indonesia is set to become one of the world's biggest economies.

Marble-walled shopping malls are sprouting from traffic-choked streets, selling Louis Vuitton and Prada handbags. Growth, projected at about 6.6 percent this year, is among the best in the G20 club of leading economies.

Yet corruption remains pervasive, sowing doubt over whether Yudhoyono can make good on other reforms aimed at sustaining Indonesia as one of the world's hottest developing markets.

"When foreign investors see unethical behavior and corruption, they appreciate it when there's an immediate and clear response," said Shubham Chaudhuri, the World Bank's senior economist in Jakarta.

In the capital's gritty streets, graft is a popular subject -- and a growing source of resentment.

"If this country wants to move forward, we need an iron-fist leader who is brave enough to stand up against corruption," said Zulkifli, a 34-year-old office worker who like many Indonesians uses one name.

In the West Papua case, the manpower and finance ministries and a powerful parliamentary budget committee are being investigated over alleged kickbacks from PT Alam Jaya Papua, which won a tender for the project. Investigators are examining whether a total 500 billion rupiah ($56 million) in projects is tainted.

The company has acknowledged giving money to Manpower Ministry officials.

TAKING A TOLL

The scandals are taking their toll. Concerns over his handling of corruption is blamed in part for the 40 point tumble to 51 percent in Yudhoyono's approval rating since his re-election to a second and final five-year term in 2009, an Indo Barometer poll showed last month.

Executives surveyed in the World Economic Forum's Global Competitiveness Report 2011-12 said corruption remained "the most problematic factor for doing business" in Indonesia despite a half-decade campaign to stamp it out.

Graft allegations against Indonesian politicians, including those in Yudhoyono's Democrat Party, have sidelined many of his legislative priorities.

As scandals grab headlines and lead nightly news broadcasts, speculation is growing of an imminent cabinet reshuffle in Yudhoyono's coalition before he finishes the second year of his current term on October 20.

"AMBIGUOUS" PARLIAMENT

The West Papua scandal bears striking similarities to other cases tackled by a six-year-old Corruption Eradication Commission. Known as KPK, it spares few, targeting judges, millionaires and members of parliament, even a Yudhoyono inlaw.

An account manager at an Indonesian company, who declined to be identified because of the sensitivity of the subject, told Reuters he came to a parliamentary office a few weeks ago to deliver a bribe hidden in a box of KFC, a practice that he described as relatively common.

"I came to parliament to meet a member of a budget team and bring 35 million rupiah ($3,900) in two boxes of KFC in order to get him to approve one of my clients," he said.

In 2010 alone, the corruption commission investigated more than 170 cases involving legislators and officials who siphoned an estimated 2.5 trillion rupiah ($280 million) from state revenue. About 190 billion rupiah ($21 million) was returned, according to KPK data.

STRONG OPPOSITION

But its successes have drawn unrelenting opposition, and it is unclear how far it can go.

For the past two weeks, leaders in parliament have sharply criticized the commission for what they see as an attempt to meddle in the assembly's work. Last week, lawmakers refused to meet commission investigators, holding up deliberations over the 2012 budget unless they backed off. The lawmakers finally relented after a week-long impasse.

The House of Representatives law commission this week accused the KPK of politicizing graft cases, neglecting those related to Yudhoyono's party, including dragging its heels in investigating Democrat Party Treasurer Muhammad Nazaruddin who is suspected of accepting bribes.

"Parliament is being ambiguous," said Abdullah Rahman, head of the political corruption division at Indonesia Corruption Watch, the country's leading anti-graft organization.

"On the one hand they say they want to be part of the battle, but when the KPK requests information, they immediately show strong resistance," he said.

In the West Papua case, commission officials seized 1.5 billion rupiah ($168,600) in cash found crammed inside a fruit box at the Manpower Ministry. It had been delivered to two ministry officials by a businesswoman whose company won the tender. Investigators describe the money as a "bonus" provided by the company in return for securing the project.

In recent days, Finance Minister Agus Martowardojo has been called in as a witness in the case and speculation is growing Manpower Minister Muhaimin Iskandar, leader of the National Awakening Party, will lose his job in a cabinet reshuffle, although he has denied involvement.

"I never gave an order (to accept bribes)," said Muhaimin.

The finance minister is adamant he is clean. "If some say the finance minister got fees from this, I'd like to say...I am not even dreaming about it," he told reporters on Wednesday.

"MEDIA SENSATION"

The case is another test of the commission's graft-busting credentials. Two of its leaders have been accused of abuse of power. They were later vindicated when wiretaps played in court proved they were framed by police and corrupt businessmen.

But many Indonesians felt Yudhoyono was slow to defend the top graft-busters.

A survey by Indonesia Survey Circle this month showed four out of five of 1,200 people surveyed did not trust politicians due to corruption. In the past six years, trust in Indonesia's elected leaders has dropped to 23.4 percent from 44.2 percent.

Graft watchdog Transparency International's corruption perception index showed no improvement for Indonesia last year, ranking it 110th overall, the same as Gabon, Bolivia, Kosovo and Solomon Islands. That compares to Southeast Asian peers Thailand in 78th place, Malaysia at 56th and Singapore at joint first.

Despite slower-than-expected reforms, Indonesia is "moving in the right direction as the business sector continues to be active and the country has shown good growth," said Andri Manuwoto, a senior analyst at CastleAsia, a consulting firm guiding outside investors with advice about political risk.

"It's not going to happen overnight," Manuwoto said. "It may take generations, but KPK has done impressive work so far."

(Additional reporting by Rieka Rahadiana, Adriana Nina Kusuma and Janeman Latul; Editing by Jason Szep and Jonathan Thatcher)