By Leonardo Goy
BRASILIA (Reuters) - Brazilian Vice President Michel Temer has decided to drop his role as day-to-day political coordinator in Congress for President Dilma Rousseff but is not leaving her government, two sources in the administration said on Monday.
Temer is an important ally of the embattled Rousseff and his decision will further hamstring the unpopular president, who is facing calls for her resignation or impeachment as the economy flounders.
The sources, who asked not to be named, said Temer would no longer handle Rousseff's political relations with coalition allies, which have been tense due to corruption allegations and disagreement over budget cuts aimed at saving the country's investment-grade credit rating.
"This will reinforce market worries about the government's ability to execute economic policies," said Rafael Cortez, a political analyst at the Tendencias consultancy in Sao Paulo.
"Temer's role was to help the government get fiscal adjustment measures through Congress," Cortez said.
Aviation Minister Eliseu Padilha, a political veteran in Temer's PMDB party, will take over the political coordination role until the end of the month, the sources said.
Earlier on Monday, in a show of commitment to austerity, the government announced plans to eliminate one in four ministries, doing away with several posts often used for political bargaining.
Temer's decision is seen as a prelude to the departure of his Brazilian Democratic Movement Party (PMDB), the nation's largest, from the governing coalition of the Workers' Party to field its own presidential candidate in 2018.
The PMDB controls both houses of Congress and its break with the government would seriously weaken Rousseff.
A party official said only a PMDB convention could result in the party leaving the coalition and no convention is scheduled this year. "We aren't in the business of overthrowing elected governments," the official told Reuters on condition of anonymity.
Opinion polls show two of every three Brazilians want to see Rousseff impeached because of Brazil's worst economic downturn in 25 years and a massive corruption scandal over political kickbacks on contracts with state-controlled companies.
Tendencias estimates a 20 percent chance that Rousseff will not serve out her term due to the political challenges she faces, Cortez said, adding that the risk could increase.
In recent months, Temer has spearheaded efforts to push through austerity legislation to cut a fiscal deficit that put Brazil's investment-grade credit rating at risk. His role has been crucial in restoring credibility to the Rousseff administration's policies in Brazil's business community.
Sources in the PMDB said on Friday that Temer was tired of dealing with government infighting over the distribution of second-tier positions to keep its allies happy.
Differences arose last week between the PMDB and Finance Minister Joaquim Levy when he opposed sparing the transportation industry from a roll back in payroll tax breaks, a move aimed at restoring fiscal revenues, the sources said.
(Writing by Anthony Boadle; Editing by Lisa Shumaker)