By Guido Nejamkis
BRASILIA, Brazil, Feb 19 (Reuters) - The Carnival holiday brought some relief for the Brazilian government in its fight against a corruption scandal on Thursday as legislators began to leave the capital for the celebrations.
But financial markets still fretted that the affair could harm the government and slow the passage of economic reforms. The local stock market and currency slipped and prices of Brazil''s sovereign bonds fell.
The so-called "Waldomiro affair" is the most serious scandal President Luiz Inacio Lula da Silva''s government has faced since it came to power 14 months ago.
It broke last Friday when a video surfaced showing an aide, Waldomiro Diniz, collecting funds from an illegal bingo operation in return for political favors from the Workers'' Party in 2002.
Diniz was fired the same day and the party insisted no wrongdoing had occurred since it took office.
The opposition has demanded a congressional investigation of the affair. The government on Wednesday announced its own internal probe in an effort to head off its enemies and to repair the damage to its hitherto clean image.
It is also resisting pressure from politicians and commentators for the head of Jose Direcu, Lula''s right-hand man, who gave Diniz a job in the presidential palace.
"The government is having to act like a firefighter putting out the flames and it is forgetting its political agenda," said Alvaro Bandeira, director at brokerage Agora Senior CTVM.
But there was little activity in Congress on Thursday ahead of Carnival, which kicks off on Friday. Legislators headed back to their home states, and in a square outside the presidential palace, a samba band played.
"The holidays will help calm down the excitement a lot," said political analyst Carlos Pio. "They will give people time to think and the government can benefit from this."
Carnival runs through next Tuesday and offices will reopen for half a day on Wednesday. But many people, including politicians, will not return until the next week.
Opposition sources said they had not expected to complete the process for launching a congressional investigation until after Carnival anyway and were confident of support.
To head off such a move, the government on Wednesday announced it would set up a commission to investigate Diniz''s actions after he arrived at the presidential palace.
While in opposition, the Workers'' Party had attacked the corruption that is rife in Brazilian politics, and the latest scandal is a blow to its image and self-esteem.
Lula, a former shoeshine boy and militant leftist, has been lauded by the business community for his conservative policies aimed at turning around Latin America''s biggest economy. ((Reporting by Guido Nejamkis, Brasilia newsroom; Editing by Dan Grebler; Reuters Messaging: guido.nejamkis.reuters.com@reuters.net; Tel: 55 61 426 7026))
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