By Anthony Boadle and Lisandra Paraguassu
BRASILIA (Reuters) - Brazilian President Michel Temer resisted calls to resign on Thursday after allegations surfaced that he condoned the bribery of a potential witness in a graft investigation, raising doubts about the future of austerity measures in Congress and sending markets tumbling.
Temer strongly denied the allegations and told allied lawmakers in a morning meeting that he would not be driven from office. He cleared the rest of the day's schedule to react to the crisis and was expected to address the nation on national TV within hours, aides said.
"We need to see what the Supreme Court says and whether it accepts this tape as evidence," one presidential aide said. "The president is absolutely convinced he committed no crime, but that has to be made clear to the eyes of everyone."
Brazilian markets slumped on concerns that the investigation could derail Temer's economic and fiscal agenda. Shares of state-controlled companies, such as Banco do Brasil SA <BBAS3.SA> and Petróleo Brasileiro SA, or Petrobras <PETR4.SA>, lost around a fifth of their value, and the nation's currency fell 6 percent.
Brazil's Treasury and central bank said they stood ready to keep markets liquid and working properly.
Federal police, meanwhile, intensified their investigations in the corruption probe, dubbed "Operation Car Wash," and closed in on Temer allies.
Officers in the southern city of Curitiba searched the home of federal deputy Rodrido Rocha Loures, a longtime confidant of Temer and a member of the president's Brazilian Democratic Movement Party, or PMDB. Loures is accused of receiving bribes on behalf of Temer, which he denies.
The O Globo newspaper reported on Wednesday night that Temer met in March with Joesley Batista, chairman of meat company JBS SA <JBSS3.SA>, which grew rapidly under 13 years of leftist Workers Party rule due largely to low-cost loans from Brazil's national development bank.
Batista recorded the conversation in which he and Temer allegedly discussed making illegal payments to jailed former House Speaker Eduardo Cunha, of the PMDB, to keep him from testifying about corruption.
Three people with direct knowledge of the investigation said the O Globo report was accurate.
The accusations are the latest in a three-year investigation that has centered on billions in political kickbacks paid by Brazil's biggest construction companies in exchange for contracts at state-run oil producer Petrobras and other government enterprises.
(Reporting By Ricardo Brito, Alonso Soto, Anthony Boadle, Lisandra Paraguassu in Brasilia, Brad Brooks and Bruno Federowski in Sao Paulo and Pedro Fonseca in Rio de Janeiro.; Writing by Brad Brooks; Editing by Daniel Flynn and Lisa Von Ahn)