By Anthony Boadle and Silvio Cascione
BRASILIA (Reuters) - Brazil's Senate forged ahead with impeachment proceedings against President Dilma Rousseff on Monday, rejecting a surprise decision by the acting speaker of the lower house, who tried to annul a key vote just days before the president could be suspended from office.
The clash between Brazil's two most senior lawmakers threw markets into disarray and threatened to drag out a painful political crisis with a constitutional standoff that could end up at the Supreme Court.
Waldir Maranhao, a little known figure in Brazilian politics before taking over as house speaker only last week, argued that procedural flaws invalidated a lower house vote on April 17 approving the impeachment charges and the chamber would need to vote again.
The speaker's decision spooked investors betting that a more business-friendly government would take power imminently, weakening Brazil's currency over 4 percent in afternoon trading. However, markets quickly pared losses as investors bet the move would delay rather than prevent Rousseff's removal from office, given her weak support in Congress.
The Supreme Court, which has been reluctant to intervene decisively in Brazil's first presidential impeachment process in 24 years, rejected requests on Monday to overturn the annulment.
In a day of chaos and confusion, Senate leadership scrambled to get the process back on track days before the most important vote so far in the drive to oust the leftist president.
Senate President Renan Calheiros said he was pressing ahead with a Wednesday vote on whether to put Rousseff on trial for breaking budgetary laws. A Senate committee recommended on Friday that Rousseff should be tried, which would suspend her from office for up to six months before a final decision that could strip her mandate.
"To accept this playing with democracy would make me personally complicit in delaying this process," Calheiros said, dismissing the surprise announcement from Maranhao. "At the end of the day, it's not for the head of the Senate to say whether this process is fair or not, it's up to the full Senate."
'DELICATE MOMENT'
The house speaker responded in a hasty press conference that his decision was supported by the constitution.
"I'm aware that this is a delicate moment. We have the duty to save democracy through debate. We are not and will not be playing with democracy," Maranhao said, without taking questions from journalists.
Even in a year of great tumult, the tussle in Brasilia was a shocking turn that could further complicate the political crisis fueling Brazil's worst recession in decades.
An ongoing investigation into a vast kickback scheme at state-run oil company Petrobras (SA:PETR4) has ensnared dozens of top politicians and jailed chief executives from Brazil's biggest construction firms for paying billions in bribes to lock up bloated building contracts.
Last week, Rousseff was caught up in the Petrobras case for the first time, when the prosecutor general asked the Supreme Court's permission to investigate her for allegedly obstructing the investigation.
If the Senate votes on Wednesday to place Rousseff on trial, Vice President Michel Temer would step in as interim president, remaining in the post until elections in 2018 if she were found guilty and removed permanently.
Rousseff has steadfastly denied wrongdoing in the Petrobras case or committing any crime that would warrant her impeachment. She has vowed from the beginning of the impeachment process to fight it by all means legally possible.
'NO LEGAL VALUE'
Monday's bombshell came from the man that last week replaced Eduardo Cunha, the speaker who launched the impeachment process but was removed by the Supreme Court on corruption charges.
Maranhao had broken with his center-right Progressive Party and voted against impeachment in last month's lower house vote, which Rousseff and her Workers Party lost by a wide margin.
In a statement on Monday, Maranhao said the impeachment process should be returned by the Senate so that the lower house can vote again. Citing irregularities such as party leaders instructing their members which way to vote, he said a new vote would take place within five sessions after the case was returned to the lower house.
"This should have no legal value whatsoever," said Ives Gandra Martins, a constitutional lawyer based in Sao Paulo. "The impeachment process is no longer even in the lower house and there are no grounds ... to annul it.
"The Senate now has the process and will continue to move ahead with it unless they find some reason to vote it down of their own," he said.
Rousseff, speaking at an event in the presidential palace, appeared surprised at the news of Maranhao's move, which came as she was speaking. The crowd broke out into wild cheers, but Rousseff cautioned them.
"It's not official and I do not know the consequences, so let's be cautious. We're dealing with circumstances of cunning and trickery," she said to supporters.