By LARRY ROHTER

SANTO ANDRÉ, Brazil — After Celso Daniel, mayor of this industrial city, was kidnapped and shot to death on Jan. 20, 2002, leaders of his Workers' Party were
quick to blame right-wing death squads. They organized an international protest campaign, which ended only after the police concluded that Mr. Daniel had been the
victim of a common crime.

But two years later, little appears common about Mr. Daniel's death. His relatives and prosecutors who reopened the case now say he was killed in a dispute over a
multimillion-dollar slush fund that, the relatives say, was meant to benefit the campaign war chest of what is now Brazil's governing party.

According to one of the mayor's brothers, João Francisco Daniel, the slush fund involved two senior party officials, who are now on the staff of President Luiz Inácio
Lula da Silva, and as such are among the most powerful men in Brazil. The two dismiss any talk of improprieties, and are not facing charges. The Workers' Party
president, José Genoino, and other party leaders deny the existence of graft here or the involvement of senior party officials.

In December, after reopening the case based on new information from the family, the police arrested Sérgio Gomes da Silva, the chief of the mayor's security detail who
is accused of supervising the municipal kickback system that financed the slush fund. He was charged with organizing Mr. Daniel's killing.

Despite the many denials, prosecutors speak openly of a slush fund. "This wasn't a kidnapping, it was a settling of scores in a fit of rage," José Reinaldo Guimaraes
Carneiro, one of the prosecutors, said in an interview. "The mayor was killed because he was trying to dismantle a corruption scheme embedded in his own City Hall." As a state prosecutor, Mr. Carneiro is limited in his ability to pursue federal officials.

Prosecutors say, and Mr. Daniel's relatives acknowledge, that the mayor knew of the secret fund, which was built on kickbacks from municipal contracts, and that he
judged it a necessary means to raise cash for a left-wing party traditionally shunned by moneyed business groups.

But when the mayor tried to stop middlemen from diverting some of that money to their own pockets, the prosecutors and relatives said, those middlemen had him killed.

"The mayor never obtained any personal benefit from the scheme," another prosecutor, Roberto Wider, said in December. "He led a life that was Franciscan" in its
austerity.

Both the Brazilian press and opposition parties, which are trying to open a separate congressional inquiry, have suggested that the national Workers' Party government is
working behind the scenes to quash the investigation. But the president of the Workers' Party, Mr. Genoino, said the party "not only is not impeding an investigation, but
supports it."

He and other senior party officials contend that the reopening of the case is politically motivated because the state of São Paulo is now, as it was two years ago when the original investigation took place, governed by the opposition Brazilian Social Democratic Party.

"We are victims two times over in this situation," Mr. Genoino told reporters in São Paulo recently. "First because Celso Daniel was one of our closest comrades and was murdered, and now because they're trying to kill the mayor a second time."

In an interview, João Francisco Daniel, the mayor's brother, said the slush fund involved José Dirceu de Oliveira e Silva and Gilberto Carvalho. Mr. Dirceu was then
president of the Workers' Party and is now the chief of staff to the president, Mr. da Silva; Mr. Carvalho was then the mayor's chief of staff and now is the president's
personal secretary.

"Not long after Celso's burial, Gilberto Carvalho told me that he made various deliveries of cash to the party and that on one occasion, he was scared because he was
carrying more than $500,000 in a suitcase," Mr. Daniel said in the interview. "He told me that he delivered the money directly to José Dirceu, and that is what I told the
prosecutors."

Through a press spokesman in the president's office, both Mr. Carvalho and Mr. Dirceu declined to discuss any aspect of the case. But on Jan. 16, one day after the
inquiry was made, Mr. Dirceu accused reporters and prosecutors of plotting against the Workers' Party and suggested that Brazil needed a press gag law.

"The constitutional rights of innumerable citizens are being violated persistently and permanently by sectors of the prosecutor's office and the Brazilian press," Mr. Dirceu said. "Congress needs to examine this extremely grave situation," he added.

In an interview, Aristides Junqueira, a former solicitor general who is now the lawyer for the Workers' Party, complained about what he called the "excesses" of
prosecutors. He also criticized João Francisco Daniel for what he described as irresponsible accusations. "It is easy for the brother to talk and make this into something
political," he said. "It is a shame that Celso Daniel is not here to clarify things."

The statements of Mr. Dirceu and Mr. Genoino have provoked a sharp response from both the national prosecutors' association and the chief prosecutor. "It cannot be
known why sectors of the federal government and a political party, who are not objects of this investigation, have expressed themselves so virulently against inquiries
aimed at uncovering the authors of this homicide," the acting chief prosecutor, Humberto Magalhaes da Silveira Jr., said in a statement on Jan. 20.

At the time of his death, Mr. Daniel, a 50-year-old economist, had been appointed coordinator of Mr. da Silva's campaign and was considered a likely choice for minister
of finance if Mr. da Silva won the presidential election, which he did by a landslide in October 2002.

Mr. Daniel's kidnapping and killing occurred at a delicate moment in the race. The poll numbers of the Workers' Party candidate had been dropping for weeks, with some even showing him slipping into second place behind Roseana Sarney, a right-leaning state governor.

In that context, the uncovering of a Workers' Party slush fund could have been a fatal blow to Mr. da Silva's candidacy. That is in fact what happened to Ms. Sarney
herself: two months later, her campaign collapsed and she pulled out of the race after a Federal Police squad raided her husband's office and found more than $600,000 in cash.

Campaign financing has always been extremely murky in Brazilian politics, with the Workers' Party leading the denunciations of what it called wholesale corruption and
dishonesty. In 1992, President Fernando Collor de Mello resigned rather than face impeachment after the press uncovered a gigantic slush fund that continued after he
took office.

According to city, party and law enforcement officials, the slush fund here was organized after Mr. Daniel became mayor in January 1997. One of his first acts was to
privatize municipal bus lines, which, according to Rosângela Gabrilli, the owner of a bus company here, immediately led to a kickback scheme initially requiring each
company to pay $350 a month per bus, a figure that gradually increased to about $500.

"It was all very calculated, with the payoff rising as bus fares rose," Ms. Gabrilli said in an interview at her company's office here. "At its peak, I was paying $41,800 a
month. Because we are a bus company, we have a lot of small bills, and they always chewed me out about that, saying they wanted to be paid in $50 notes."

Santo André, a city of 700,000 that borders the city of São Paulo and forms part of that state, has a half dozen bus companies and more than 325 buses. By the
calculations of Ms. Gabrilli and others, that meant the slush fund was collecting more than $100,000 a month just from bus contracts, fare increases and route changes
from January 1997 until Mr. Daniel's death, when the demands for kickbacks, she said, immediately stopped.

A Workers' Party member of the City Council, Ricardo Alvarez, said he had complained to Mr. Daniel about additional irregularities in garbage pickup, public works and
traffic ticket collection. Prosecutors have confirmed that they are now also investigating the awarding of contracts in some of those areas.

"The national directorate of the party could have taken a different posture as relates to all of this," Mr. Alvarez said in an interview at City Hall here. "The original
investigation was riddled with holes, shortcomings and unanswered questions. If there is a political cover-up going on, it is in the sense of not allowing the case to be
clarified."

Through bank records, the police and prosecutors have established that at least some of the bus company payoffs ended up in a bank account of the man accused of
organizing the killing of the mayor, Mr. Gomes da Silva, also known as "Sérgio the Shadow." But they have so far been stymied in their efforts to trace the money once it left Mr. Gomes da Silva's control, in part because of a lack of cooperation from federal agencies.

Transcripts of police wiretaps in the days after Mr. Daniel was killed indicate that party leaders were extraordinarily concerned with neutralizing what they recognized
could be a public relations disaster. In a conversation in mid-February, Mr. Carvalho discussed with Mr. Gomes da Silva a meeting to be held at Mr. Dirceu's house to
plan their damage control efforts.

"We are going to talk about our tactics for this week," Mr. Carvalho said to Mr. Gomes da Silva, according to versions of the transcript published in Brazilian newspapers. "We are going to have to go on the counteroffensive."

Party leaders have protested the legality of the recordings and sought to have them destroyed, but they have never contested their authenticity. Mr. Junqueira, the party
lawyer, said that contrary to the impression the wiretap may convey, Mr. Gomes da Silva did not in fact take part in any discussions at Mr. Dirceu's house and did not
meet with Mr. Dirceu.

In another conversation, an official of the Workers' Party here congratulates Mr. Daniel's girlfriend, Ivone Santana, on a long article about her published in a São Paulo
newspaper a week after Mr. Daniel's death.

"Your interview was fine," he said. "This line that you're taking, that of the grieving widow, is really terrific."