The U.S. Justice Department appointed a special counsel to lead the investigation into Russian interference in the 2016 election and to examine possible collusion between advisers to President Donald Trump and the Kremlin.

The move, which Democrats have demanded and Republicans have resisted, marks a dramatic turn in a probe whose handling has roiled U.S. politics and shaken investors. The appointment of Robert Mueller, a highly respected former director of the Federal Bureau of Investigation, to oversee the probe comes in response to increasing pressure for an inquiry that is independent of potential political interference.

On Thursday, President Trump tweeted: "This is the single greatest witch hunt of a politician in American history!"

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A special counsel operates at arm's length from the government, with the power to investigate and recommend charges in politically sensitive cases.

Explainer: Who is Robert Mueller, and what will he do? A primer on the Trump-Russia probe's new player

"I determined that a special counsel is necessary in order for the American people to have full confidence in the outcome," deputy Attorney-General Rod Rosenstein said in a statement. "My decision is not a finding that crimes have been committed or that any prosecution is warranted. I have made no such determination."

Mr. Trump said in a statement issued by the White House that "a thorough investigation will confirm what we already know – there was no collusion between my campaign and any foreign entity." He added that he looked forward "to this matter concluding quickly."

The announcement of a special counsel follows a tumultuous eight-day period that began when Mr. Trump abruptly fired FBI Director James Comey on May 9. On Tuesday this week, The New York Times reported that Mr. Trump met with Mr. Comey in February and urged him to shut down the investigation probing ties between Michael Flynn, the former national-security adviser, and Russian officials. The White House denies such a conversation took place.

Mr. Mueller, who will serve as the special counsel, was previously the FBI director from 2001 to 2013. Nominated to the position by George W. Bush, Mr. Mueller was asked to remain in the role beyond his original 10-year term by Barack Obama.

The appointment of Mr. Mueller to take over the investigation could help to address a growing furor over the President's alleged efforts to influence the course of the probe.

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Mr. Mueller is "exactly the right kind of individual to serve as special counsel," Chuck Schumer, the most senior Democrat in the Senate, said in a statement. "I now have significantly greater confidence that the investigation will follow the facts wherever they lead."

Mr. Mueller will still ultimately answer to the Justice Department, but will operate independently and have no obligation to consult the department as the investigation proceeds.

The decision to appoint the special counsel was in the hands of Mr. Rosenstein, the No. 2 Justice official, rather than Attorney-General Jeff Sessions, a close ally of Mr. Trump. Mr. Sessions had recused himself from matters relating to the Russia investigation after it emerged that he had not been forthright about his meetings with the Russian ambassador to the United States.

The role of special counsel dates back to 1999. Previously, lawyers appointed to oversee investigations of executive-branch wrongdoing functioned under a statute that authorized the appointment of a "special prosecutor" and later an "independent counsel." Such prosecutors led investigations into the Iran-Contra Affair under Ronald Reagan and the Whitewater and Lewinsky scandals under Bill Clinton.

Wednesday's announcement capped a day of fast-moving developments in the unfolding Russia controversy. Republicans called for Mr. Comey, the former FBI director, to testify about his conversations with Mr. Trump as they sought to contain a controversy that is already undermining their legislative agenda.

Even for Mr. Trump's backers in Congress, the crisis has reached a point where many believe it must be confronted head-on through public hearings as soon as possible.

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Democrats, meanwhile, warned that the President's behaviour may have constituted an obstruction of justice under U.S. law, which makes it a crime to impede or influence an investigation for improper purposes.

As the political turmoil continued, rattled U.S. investors sent the Dow Jones Industrial Average plunging 373 points, or 1.8 per cent. Speaking at the commencement ceremony for new graduates of the U.S. Coast Guard Academy, Mr. Trump said that "no politician in history … has been treated worse or more unfairly" than he had.

Meanwhile, a top Republican congressional leader, secretly said last year that he believed Mr. Trump was receiving money from Mr. Putin, The Washington Post reported Wednesday, citing a leaked recording of a conversation between several Republican politicians. Kevin McCarthy, the House Majority Leader, originally denied making the comment then said the comment was meant as a joke.

The leaders of three congressional committees said Wednesday that they had invited Mr. Comey to testify. They also called on the FBI to provide all documents relevant to the meetings between Mr. Comey and Mr. Trump. Mr. Comey reportedly wrote a memo shortly after meeting with the President in February. It described an encounter in which Mr. Trump urged Mr. Comey to "let this go," referring to the probe into Mr. Flynn, the former national-security adviser.

For the small handful of Republican lawmakers who were already openly uncomfortable with Mr. Trump's firing of Mr. Comey, the new allegations about the February meeting provoked full-scale alarm. Two Republican members of the House of Representatives, Justin Amash of Michigan and Carlos Curbelo of Florida, said Wednesday that if the allegations about Mr. Trump's conduct were true, they would represent grounds for impeachment.

Most Republicans, however, refrained from public criticisms of the President. "Privately, many [Republican] members of Congress are exasperated" with Mr. Trump, said Kevin Madden, a Republican political strategist. "But many of them believe that the most vocal members of their political base are still strongly behind the President."

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Molly Reynolds, an expert on Congress at the Brookings Institution in Washington said that the broader Republican agenda could grind to a halt amid the Comey firestorm. The scandal absorbs time and energy that could otherwise be devoted to legislation, she said, plus a President in Mr. Trump's position will find it hard to broker legislative deals between warring factions of his own party on issues like health care.

"It is more difficult to try to bridge these divides when you have a President who is not popular and politically weak," Ms. Reynolds said.

The next phase of the controversy is already looming. "The President has now put himself in a 'he said, he said' confrontation" with Mr. Comey, a person respected by lawmakers for his integrity and forthrightness, said Mr. Madden, the Republican strategist.

Mr. Comey's testimony, which could take place as soon as next week, will be a crucial turning point. "This is an iceberg where we still don't really know how big it is," said Sam Buell, a former federal prosecutor and a law professor at Duke University. "Were there other conversations [between Mr. Trump and Mr. Comey]? Were there other memos? It's not going to get any better for the President at this point."

Proving obstruction of justice can be difficult. Prosecutors must show that a person sought to "corruptly" interfere or impede with an ongoing legal proceeding – in other words, they must prove that the intent was improper.

If Mr. Comey's account of the meeting is accurate, then the President, "either through maladroitness or culpability, injected himself improperly in a non-partisan FBI criminal and counterintelligence investigation," said Timothy Naftali, a presidential historian at New York University.

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"It's the President who has put himself smack in the middle of this and turned what was a scandal into a presidential crisis."