By Raymond Colitt and Brian Winter
BRASILIA (Reuters) - The most powerful pro-business voice in Brazil's government resigned on Tuesday following a scandal over his sudden enrichment, prompting worries on Wall Street that his departure could herald a leftward drift in economic policy.
Chief of staff Antonio Palocci, described by fellow ministers as the most influential member of President Dilma Rousseff's government, said he quit to prevent the scandal from further weakening her five-month-old administration.
Palocci's departure deprives Rousseff of an ambassador to Wall Street who had acquired an almost mythical reputation for his defense of responsible fiscal and monetary policies in a party with strong roots in trade unionism.
Palocci's work as finance minister in a previous government helped lay the groundwork for Brazil's current economic boom.
His departure is unlikely to result in any immediate policy shifts, as Rousseff and other senior officials have repeatedly stressed their commitment to keeping inflation low and budget spending under control. The pillars of Brazil's prosperity have remained largely unchanged for a decade.
Yet Palocci's absence could, in the long run, reduce Rousseff's determination or ability to pass market-friendly policy changes such as a simplification of the tax code.
It will also likely encourage other officials in government and the ruling Workers' Party who want greater state intervention in key industries such as oil.
"This doesn't look good. Palocci was really the voice of reason in the government," said John Welch, chief emerging markets strategist at Macquarie Capital in New York. "Palocci was for fiscal responsibility and clearly some people in the (Workers' Party) wanted him out."
Palocci's replacement as chief of staff will be a little-known, 45-year-old senator, Gleisi Hoffman, who is also the wife of the communications minister.
The switch leaves Rousseff, a career bureaucrat with no previous experience in elected office, with a senior staff that is long on economics degrees like her own -- but perilously short on the political skills that are critical to maintaining power and getting legislation through Brazil's rowdy Congress.
Hers has already been somewhat of a status-quo presidency, coasting on Brazil's strong economic growth with no major attempts at economic policy changes.
The crisis could also open the door for an even greater -- if still informal -- political role for Rousseff's predecessor and political mentor, Luiz Inacio Lula da Silva, whose enormous charisma and record of economic success during his 8 years in power overshadows almost every aspect of Brazilian politics.
MARKET SELL-OFF TO BE LIMITED
Markets reacted negatively to Palocci's resignation with prices for Brazil's sovereign bonds falling slightly. However, some investors said the sell-off was likely to be limited due to the country's entrenched economic stability.
"Palocci's departure was expected. Political noise is always bad for markets, but I am sure that the effect on asset prices won't be too big," said Carlos de la Rocque, a fixed income and derivatives trader at Brasif Gestao.
Palocci denied wrongdoing in the statement announcing his resignation on Tuesday, saying his decision to step aside was purely political.
Yet a newspaper report that his net worth had expanded by a factor of 20 when he consulted companies while simultaneously serving in Congress from 2006 to 2010, prompted allegations of improper influence-trafficking that may not vanish with his departure.
The 50-year-old trained doctor and former Trotskyite was a unique, if mercurial figure.
His rise to power mirrored the Workers' Party's evolution over the past 15 years from a hard-left perennial loser in Brazilian politics into a pragmatic, market-friendly group that has helped turn Brazil into one of the world's hottest emerging market economies.
Yet Palocci's enormous influence with Rousseff and his close ties with major businesses also won him many enemies within even his own party, helping explain why he was forced out despite no legal charges against him.
His political career is now likely over, especially since his tenure as Lula's finance minister ended in 2006 following a separate ethics scandal.
The lasting impact of the crisis may depend on whether Rousseff and other officials can develop the political skills needed to push reforms through Congress that would, in turn, address structural problems such as Brazil's dilapidated infrastructure and overburdened pension system.
"I think President Rousseff will easily overcome his departure and substitute his absence with either a new aide or with the strengthening of her own leadership. No one is indispensable," said Alfredo Coutino, director for Latin America of Moody's Analytics.
(Additional reporting by Jeferson Ribeiro and Guillermo Parra-Bernal, and Walter Brandimarte in New York; Editing by Kieran Murray)