BRASILIA, Brazil, March 7 (Reuters) -- A key partner in Brazil's ruling
                 coalition quit the government on Thursday, ending a seven-year alliance and
                 setting the scene for a bitter fight with President Fernando Henrique
                 Cardoso's party at general elections in October.

                 The Liberal Front Party, or PFL, said it withdrew from the unprecedented
                 two-term coalition after authorities initiated a fraud probe into the business dealings
                 of a firm belonging to its presidential candidate, Roseana Sarney, and her husband.

                 The investigation outraged leaders of the PFL, Cardoso's most important ally in the
                 center-right, four-party coalition. They suggested the probe was orchestrated by
                 government opponents wanting to tarnish her presidential bid.

                 "Our candidate was the victim of unprecedented violence, with clear political
                 consequences, with the intention of weakening her and even pushing her out of the
                 race," the PFL said in a statement after a meeting on Thursday of party leaders to
                 make the decision official.

                 "Due to this we concluded that the political reasons that sustained our alliance
                 disappeared and our presence in the government is no longer justified," the
                 statement added.

                 Leaders of Cardoso's party have vehemently denied they had anything to do with
                 the police raid on a company belonging to Sarney's husband on suspicions it was
                 involved in defrauding millions from a former Amazon development agency.

                 Sarney has stormed ahead in the polls in the last six months to share the lead with
                 the main opposition Workers Party Candidate, with about 25 percent of the vote
                 each. The candidate of Cardoso's Brazilian Social Democratic Party (PSDB),
                 former Health Minister Jose Serra, lags far behind.

                 Cardoso, who cannot stand for the presidency again, cut short a visit to Panama
                 amid the disarray. He had hoped to keep election-year politics from upstaging the
                 last year of his rule and blocking the passage of bills in Congress.

                 Financial markets have fretted about the split, driving down Brazil's real currency
                 and its bonds on the fear that the PFL will no longer support government bills. That
                 applies above all to the extension of a financial tax (CPMF), which could cost the
                 government 400 million reais ($170 million) a week if not passed.

                 "Realistically one should not expect much more from Congress in 2002 other than
                 the renewal of the CPMF tax," said Constant in Jancso of the economic consulting
                 firm MCM.

                 Analysts said it was too early to say how the split would impact the election,
                 although it could benefit the left-wing as the center-right vote could be split
                 between Serra and Sarney.

                 "I think this at first appears to reinforce opposition parties," said Roberio Costa,
                 senior economist at Interbank. "The electoral landscape is now more complicated,
                 that's for sure."

                 Sarney's brother, Jose Sarney, resigned from the government as environment
                 minister on Monday and the PFL's three remaining government ministers will leave
                 on Thursday.

                 Sarney, daughter of a former president and governor of the state of Maranhao, had
                 raised the stakes by threatening to withdraw her candidacy unless her party pulled
                 out of government. Brazil's first woman presidential candidate said the raid was
                 "discrimination" against her for being a woman.

                 "For the first time the party decided to march with me," Sarney told reporters. "I
                 am not scared and I will fight to win."

                 During the 1994 election, when Cardoso was first elected, the PFL obediently
                 backed Cardoso, as it did in 1998 when Cardoso was re-elected. It settled for the
                 vice-presidency throughout those two terms.

                 ($1 U.S. dollar equals 2.37 reais)

                    Copyright 2002 Reuters.