By Lisandra Paraguassu and Patricia Duarte
BRASILIA/SAO PAULO (Reuters) - President Dilma Rousseff, threatened with impeachment and a massive corruption probe, named her charismatic predecessor Luiz Inacio Lula da Silva as chief of staff on Wednesday, a move that offers him some protection from prosecutors who charged him with money laundering.
Opponents warned that Lula, who has called for more public spending to end Brazil's worst recession in decades, may push Rousseff to abandon the government's austerity measures. They called the move a desperate attempt to avoid impeachment and spare Lula from arrest.
The decision was announced after a meeting of Rousseff's closest advisors. The government has been shaken by graft allegations, and huge protests on Sunday called for Rousseff's ouster.
Brazil's central bank chief Alexandre Tombini may step down if Lula's return entails a major economic policy shift, a senior member of the government's economic team said, asking not to be identified.
Rousseff said Lula had a history of championing fiscal stability and combating inflation and she denied either Tombini or her finance minister Nelson Barbosa were leaving.
"They are more involved than ever," she told journalists.
Brazil's currency <BRBY> slid as much as 2 percent on Wednesday and has lost around 6 percent this week as Rousseff's invitation to Lula fed fears of a policy swing.
Credit rating agency Moody's, which downgraded Brazil's debt to junk status last month, said Lula's appointment marked a further shift toward political expediency at the expense of fiscal reforms.
Rousseff, facing a storm of corruption allegations in the two-year-old graft probe known as Operation Car Wash, hopes Lula's charisma and deep relationships in Congress can help her avert impeachment.
Workers' Party lawmakers embraced the return of their party's founder to the halls of power, rejecting the idea that he was dodging an investigation. Once appointed, Lula can only be tried in the Supreme Court, placing him temporarily out of the reach of ongoing state and federal probes.
"Lula's appointment is an affront to the Brazilians that took to the streets on Sunday," said Senator Ronaldo Caiado, one of several opposition leaders who vowed to challenge the move in court. "Lula is not serving the Brazilian people; he's trying to hide from Operation Car Wash."
OVERSHADOWED BY ALLEGATIONS
The former president's return to Brasilia on Tuesday for talks with Rousseff was overshadowed by fresh corruption accusations by Senator Delcídio do Amaral, a close Workers' Party ally of the president until he was arrested last year.
In plea bargain testimony, Amaral said Lula and Rousseff knew about a massive graft scheme at state-run oil company Petrobras and one of her ministers had tried to buy his silence.
Sao Paulo state prosecutors are seeking Lula's arrest for allegedly concealing ownership of a beachfront condo built and furnished by an engineering conglomerate caught up in the Petrobras probe.
Lula, Rousseff and her ministers have denied any wrongdoing. Rousseff said Lula's appointment did not mean he is above investigation as he could be tried by the country's top court.
Rousseff's popularity has been pummeled by a recession on track to be the worst in over a century and the biggest corruption investigation in Brazil's history, stemming from a political kickback scheme among Petrobras contractors.
Analysts at Brasilia-based ARKO Advice said Rousseff's impeachment chances are still high at around 60 percent.
The graft probe, named for a money laundering investigation that started at a car wash in the capital Brasilia, has rattled the heights of Brazil's political establishment and jailed dozens of prominent business leaders.
Outrage at the scandal prompted more than a million people to join demonstrations across Brazil on Sunday, calling for Rousseff's impeachment.
The Supreme Court confirmed on Wednesday an earlier decision increasing the role of the Senate in impeachment proceedings. Rousseff would not automatically be suspended if the lower house, led by her political archenemy Eduardo Cunha, decides to impeach her as the Senate, where she has enjoyed more support, could block an impeachment trial.
Impeachment efforts focused originally on accusations that Rousseff intentionally broke budget rules to boost government spending during her 2014 reelection campaign, but gained steam as corruption allegations reached her inner circle.
Cunha's Brazilian Democratic Movement Party (PMDB), the main partner in Rousseff's coalition, is moving closer to breaking with a president they blame for ruining Brazil's economy, but the party remains divided over her impeachment.
Cunha said this week he plans to speed up the process with the appointment of an impeachment committee as soon as the Supreme Court sets the rules.
(Additional reporting by Anthony Boadle in Brasilia and Guillermo Parra-Bernal in Sao Paulo; Writing by Anthony Boadle, Brad Haynes and Caroline Stauffer; Editing by Daniel Flynn, W Simon and David Gregorio)