Aug. 12 (Bloomberg) -- Brazil's President Luiz Inacio Lula da Silva apologized to the nation amid allegations of government corruption and called on his cabinet to ensure a congressional probe into the claims doesn't stunt economic growth.

``I urge you please not to lose faith,'' Lula, 59, said today in the nationally televised address. ``All those who are caught responsible will be brought to justice.''

Lula spoke as the nation's bonds, currency and stocks tumbled for a second day as fresh allegations surface daily that members of his Workers' Party and government paid bribes to win votes in Congress. Lula said he is conscious of the gravity of the crisis and apologized to the nation.

The Bovespa stock index extended its decline after the speech, dropping 1.5 percent to 26,222.41 at 1:13 p.m. New York time. The currency fell 0.7 percent to 2.3828 per dollar. The yield on the 11 percent bond due 2040 rose to 9.31 percent from 9.26 percent yesterday. The price that moves inversely to the yield fell 0.75 cent on the dollar to 117.30 cents, according to JPMorgan Chase & Co.

``The market was probably expecting Lula to make a stronger statement, not just a simple apology,'' said Vitali Meschoulam, a strategist for HSBC Securities USA Inc. in New York. ``This speech will hardly calm down the opposition.''

Lula said he is aware of the seriousness of the charges.

`Betrayed'

``I feel betrayed for unacceptable practices,'' Lula, speaking from the presidential ranch after a cabinet meeting. ``I am conscious of the gravity of this political crisis.''

The president's speech was his second in a month to respond to new allegations from a congressional graft probe. The investigation is eroding support for Lula, and may prompt him to boost spending ahead of next year's presidential election, said investors such as Loic Cadiou at Credit Agricole. A new poll today showed Lula's approval rating this week fell to its lowest ever.

``The risk is of a more populist Lula and that it in turn contaminates the credit,'' said Cadiou, who manages more than $1 billion in emerging market debt, including Brazilian bonds, for Credit Agricole Asset Management in London.

The Brazilian real had it biggest drop in almost three years yesterday and stocks and bonds tumbled after Lula's 2002 election campaign manager, Duda Mendonca, testified that he was partly paid for services with money from a federal contractor under investigation by Congress.

Concerns

The claims intensified concern that a two-month-old congressional probe is weakening Lula's support and making him more vulnerable to demands by unions to boost spending on wages and businesses to cut taxes.

``The speech just showed that Lula is weak and he doesn't know how punish his friends,'' said Joao Medeiros, a partner at Pioneer Corretora de Cambio in Sao Paulo, which handles a third of $1 billion traded daily in Brazil. ``Lula once more passed the responsibility for what's going on to the justice system. It would have been better for the country if he had told the truth and end this crisis''

The Senate this week voted to boost the minimum wage by 48 percent, a move that would tack on 45 billion reais to government spending in the next two years. The increase, which needs lower house approval, can by vetoed by Lula.

``Economic policy has been solid and very successful but news that the government lost in Congress on its minimum wage proposal show that it's useless to have good ideas for fiscal policy if you don't have support in Congress,'' said Mario Mesquita, chief Brazil economist with ABN Amro Bank NV.

Lawmakers such as Senator Alvaro Dias yesterday also stepped up calls to call on Congress to consider seeking Lula's impeachment.

Falling Inflation

John Peta, who manages about $800 million of debt, including Brazilian bonds, at Standish Mellon Asset Management in Boston, said he remains confident in Lula's government because of its record on the economy. Lula helped cut the inflation rate by more than half since 2003 to 6.57 percent in July by curbing spending and narrowed the budget deficit.

The economy grew 2.9 percent in the first quarter from a year ago after 4.7 percent growth in the fourth quarter last year.

``The fundamentals of Brazil are looking pretty decent,'' Peta said. ``The orthodox policies that have being put in place by Lula administration we think they are still pretty much accepted as the way to go. We don't really see at this point a whole lot of backtracking in economic policy.''

Brazil's bond due 2040 has more than doubled in price since Lula took office and the nation's currency and stocks have surged as the former union leader surprised investors concerned he would increase spending and risk defaulting on the nation's more than $400 billion of debt.

``The speech was not as bad as it could have been,'' said Jeremy Brewin, who helps manage $500 million of emerging market bonds, including Brazilian bonds, at Morely Fund Management in London. ``He was frank and open.''

Bonds

Investors demand 3.7 percentage points more yield to hold Brazil's 7 7/8 percent bond due 2015 than a comparable maturity U.S. Treasury. That spread has narrowed from 4.3 percentage points in May. The nation's foreign currency bond are rated BB-by Standard & Poor's, three steps below investment grade, and B1 by Moody's Investors Service, four steps below.

Lula has cut the government's annual budget deficit by three- quarters to 2.8 percent of gross domestic product in June by trimming pension expenses, clamping down on tax evasion and social security fraud and slowing the pace of state investments. Brazil's currency is the world's best performer this year against the dollar among 60 tracked by Bloomberg with a gain of 11 percent. The Bovespa stock index is up 13 percent in dollar terms.

Lula's comments were the first time he responded to the allegations of government corruption since an Aug. 8 radio address when he pledged to punish all those found guilty of wrongdoing.

Dirceu

More than two dozen government officials have left office, including Jose Dirceu, Lula's chief of staff, 19 state company executives and four senior Workers' Party officials since lower house deputy on June 6 first alleged Lula's party bribed lawmakers to win votes in Congress.

``I am indignant about the revelations that have appeared each day and shock the country,'' said Lula, wearing a red tie adorned with Brazil's flag. ``The Workers' Party was created exactly to strengthen the ethics of politics and to fight side by side with the poor people and the middle class. I haven't changed and I am sure that the same indignation I feel is shared by the majority of all those who followed us along this course.''

Venezuelan President Hugo Chavez, who dined with Lula last night in Brasilia, said today the political opposition engineered the bribery scandal.

``I sense that this is a campaign by the traditional political class, specifically the Brazilian right,'' Chavez, 51, told reporters early today. ``It's a barrage, an attack against the president, and I believe this has to be coming from some kind of planning center here inside Brazil or, even, outside Brazil.''

Valerio

Mendonca, an advertising executive, said yesterday that the Workers' Party paid part of the 11.5 million reais owed to him for the campaign through state contractor Marcos Valerio Fernandes de Souza. Congress is investigating whether Valerio, 44, laundered illegal contributions to the party via inflated contracts with state companies and other donors to help the party pay expenses.

Valerio, through spokeswoman Claudia Leal, denied the allegations yesterday. Lula's office, through spokeswoman Ana Maria Matos, declined to comment.

The Workers' Party has said in several statements that it is investigating whether members of its board violated electoral laws.

The party denies it bribed lawmakers with Valerio's help.

Lula's approval rating fell to 31 percent on Aug. 10 from 35 percent in a July 21 poll and 36 percent on June 16, Sao Paulo- based DataFolha polling company said today on its Web site. The rating is the lowest since Lula took office in January 2003 and down from as high as 45 percent on August last year.

DataFolha interviewed 2,551 people on Aug. 10 in 127 municipalities for the poll, which had a margin of error of plus or minus 2 percentage points.

To contact the reporters on this story: Andrew J. Barden in Sao Paulo on at barden@bloomberg.net

Last Updated: August 12, 2005 13:22 EDT