(Updates with quotes, details from press conference)
By Pedro Fonseca
RIO DE JANEIRO, Sept 26 (Reuters) - Brazilian police on Monday arrested Antonio Palocci, a powerful former finance minister and presidential chief of staff in recent Workers Party (PT) governments, as a sweeping anti-corruption probe hit even harder at the left-leaning party.
Prosecutors said at a news conference that Palocci acted as a liaison between the PT and Brazil's largest engineering and construction conglomerate, Odebrecht SA, from 2006 to 2013 in a kickback scheme centered on contracts at state-led oil company Petroleo Brasileiro SA, or Petrobras.
"Evidence has surfaced ... that he was responsible for coordinating his political party's receipt of surreptitious payments from the Odebrecht Group," read Monday's search and arrest warrant signed by anti-corruption judge Sergio Moro.
Investigators allege Palocci improperly approved loans from state development bank BNDES to Odebrecht in Africa and for oil platforms. They also allege that he pushed legislation through Congress to help the company win tax advantages.
Prosecutors said they had found evidence that Odebrecht paid 128 million reais ($39.5 million) to the Workers Party and its representatives between 2008 and 2013, including Palocci.
Construction magnate Marcelo Odebrecht, whose family owns the namesake company, received a 19-year sentence in March for bribery, money laundering and organized crime in relation to the scandal at Petrobras.
Two former aides of Palocci were arrested in Monday's police sweep.
A medical doctor by training, Palocci was former president Luiz Inacio Lula da Silva's finance minister and a key player in the 2002 election campaign that put the union and PT leader in the presidential seat.
He also served as chief of staff to Lula's hand-picked successor, Dilma Rousseff, ousted last month in an impeachment trial that ended 13 years of PT rule.
She was succeeded by her former vice-president Michel Temer, whose political and economic policies have veered sharply to the right.
Palocci's lawyer did not immediately respond to requests for comment about Monday's accusations.
Odebrecht's press office said the company would not comment. BNDES officials did not immediately respond to a request for comment.
Palocci's arrest brings the investigation of Brazil's biggest corruption scandal further into the core leadership of the PT.
Last week, police detained Guido Mantega, who succeeded Palocci as Lula's finance minister and stayed in the post for almost nine years.
Mantega, who was accused of corruption, was released after a few hours. Palocci was picked up on the same warrant, which could mean his detention will also be brief.
"This is another nail in the Workers Party coffin," said Andre Cesar, a political analyst at Brasilia-based public policy consultancy Hold Legislative Advisors. "The circle is closing."
Lula was indicted last week on corruption charges in a case involving a luxury seaside apartment that prosecutors say was a disguised bribe from a construction company implicated in the Petrobras scheme. Still one of Brazil's most popular politicians, his arrest is unlikely before he goes on trial.
Palocci helped Lula change his image from leftist radical into a business friendly and socially progressive leader who finally secured election on his fourth bid. As finance minister from 2003 he continued the anti-inflation and pro-market policies of the previous centrist government, helping calm financial markets' concerns about Lula's presidency.
But Palocci was forced to resign in 2006 amid allegations he lied to congress about frequenting a mansion used by lobbyists in the capital Brasilia, where political graft was alleged to have been negotiated.
He joined Rousseff's administration as chief of staff. However, he stepped down six months later on media reports that his personal wealth jumped by a factor of 20 as a consultant for private companies while also serving in Congress from 2006 to 2010.
$1 = 3.2394 Brazilian reais Additional reporting by Anthony Boadle in Brasilia and Brad Brooks in Sao Paulo; Editing by Daniel Flynn and W Simon