By Fiona Ortiz and Elisabeth O'Leary
MADRID (Reuters) - Dissent is growing within the usually disciplined ranks of Spain's ruling center-right People's Party over a corruption scandal, but there are few signs yet of any rebellion strong enough to topple Prime Minister Mariano Rajoy.
Rajoy has denied any wrongdoing in the affair which involves Swiss bank accounts and allegations of a party slush fund, but it has eroded his credibility as he tries to plug a huge budget deficit and prove Spain is not the weak link of the euro zone.
A moderate conservative whose signature political strategy is to sit tight while opponents wear themselves out, Rajoy has made no dramatic announcements of a party clean-up or sacked any officials, saying he will let justice take its course.
Frustrated by this caution, some People's Party (PP) members are joining opposition demands for Rajoy to step down. They argue his authority has been so damaged he can no longer deal with Spain's many crises, although none has yet rebelled openly.
"The situation is unbearable. It's impossible for a government to function with this focus on the scandal. The solution is to elect a new leader in the party," said one senior member of the party, who asked not to be named.
Already Rajoy is grappling with a recession and sky-high unemployment, rising separatist fervor in the Catalonia region and street protests over cuts in school and hospital spending.
Now the government has been rocked by the testimony of former PP treasurer Luis Barcenas who told a judge he collected millions of euros in cash donations from construction magnates and distributed the funds to party leaders including Rajoy.
In what little he has said about the affair, Rajoy has played on fears of uncertainty during the crises that have taken Spain close at times to needing a full international bailout.
Counting on a gradual economic recovery beginning this year, he has also reminded business leaders that - unlike the fragile coalitions of Italy and Greece - his government enjoys the strongest parliamentary majority of any in southern Europe and does not face elections until 2015.
"I will defend political stability and I will fulfill the mandate given to me by Spanish voters," he said this week.
Barcenas, who ran PP finances for two decades, is in jail and charged with bribery, tax evasion and other crimes. Prosecutors say he accumulated up to 48 million euros ($63 million) in Swiss bank accounts that did not come from legitimate earnings.
But Barcenas has not provided hard evidence that any other politicians were involved in the operations of the slush fund he says he ran, and no one else from the party is charged with crimes in the case.
Under Spain's political system, the PP could choose a new leader that parliament would elect to run the government, without having to call early elections in which the party would almost certainly lose its majority.
Two party sources told Reuters that disenchantment reached a peak last week when it emerged Rajoy exchanged text messages of support with Barcenas after the scandal broke.
"He's in a dead-end street. He cannot maintain control of policy in such a tough situation when he also has weakness in the party," said a PP member of parliament, who also asked not to be named.
Former Prime Minister Jose Maria Aznar and the ex-president of the region of Madrid, Esperanza Aguirre, have publicly criticized the handling of the Barcenas affair but stopped short of calling for a new leader.
Aznar chose Rajoy as his successor, but he is from the more conservative wing of the party while Rajoy is more moderate. "It is clear there is a battle for power going on, fought out through the media from the right wing of the party," said a business leader close to the PP.
Government officials scoff at the idea of party infighting. However, they acknowledge Rajoy has an image problem, exacerbated by his avoidance of taking questions in public.
That problem will, they argue, be redressed soon by an appearance in parliament, where the Socialist opposition has threatened to call a no-confidence vote if he does not agree to answer questions from lawmakers.
Rajoy would almost certainly survive a no-confidence vote. The PP has 185 deputies in the 350-member parliament and, notwithstanding the current rumblings of discontent, party discipline has almost never broken.
Early elections seem unlikely. The latest opinion poll by Metroscopia shows PP's support has dropped to 25 percent from 44 percent in the 2011 general election, but the Socialists are faring even worse with the former Communists making huge gains at their expense.
Rajoy argues that with his majority he can push through tough reforms demanded by the European Union to make the Spanish economy more competitive, despite the flagging public popularity and growing party dissent.
The weakened Socialists have no hope of forcing early elections which, if called now, would produce a highly fragmented parliament and heightened political instability.
Political analysts say that in the short term, any revolt in the PP will remain muted. "For the moment, it continues to be a very united party," said Juan Carlos Rodriguez, an analyst with ASP Research Center, an independent social sciences institute.
Rodriguez said public discontent with Rajoy is centered on the economy rather than the scandal. "In Spain there have been a lot of governments that did not suffer a big electoral impact from corruption scandals. In 1996 the Socialists lost by only one (percentage) point after a major corruption case. The punishment was not very strong," he said.
Political analysts say Rajoy also has no clear rival in the party at the moment, although his deputy Soraya Saenz de Santamaria is well regarded. Party veterans with strong personal political bases, such as Aznar or Aguirre, are also tainted by having been in power while Barcenas was running party finances.
Rajoy's customary approach will pay off because there does not seem to be any case against him from a legal point of view, said Jose Luis Alvarez, professor of sociology at France's INSEAD business school. "It's a legalistic defense tactic," Alvarez said. "I don't think he'll have to step down. I haven't seen anything so far that would make him have to go." ($1 = 0.7637 euros)
(Editing by David Stamp)