BRASILIA, May 18 (Reuters) - Brazil’s President Michel Temer on Thursday defiantly said he would not resign from office despite a Supreme Court decision authorizing an investigation into allegations he condoned bribery of a potential witness in a major corruption probe.

The investigation into a sitting president sent Brazilian financial markets tumbling on doubts Congress would pass Temer’s ambitious austerity agenda.

In a terse five-minute speech broadcast nationwide, Temer said he had done nothing wrong, that his presidency was helping turn around Brazil’s stalled economy and he welcomed an investigation so that he could prove his innocence.

“I did not buy the silence of anyone,” Temer said, referring to the allegations made against him. “I will not resign.”

The allegations plunged Brazil back into political turmoil less than a year after Temer, 76, played a key role in the impeachment of his predecessor, former President Dilma Rousseff.

Temer’s situation grew more perilous after the Supreme Court approved an investigation into allegations against him, according to a source with direct knowledge of the decision.

A Supreme Court justice also approved plea-bargain testimony and an audio recording that allegedly captured him conspiring to obstruct justice with Joesley Batista, chairman of the world’s largest meatpacker, JBS SA. That approval allows the court to quickly make both the testimony and audio public.

Leaders of Temer’s biggest allied party in Congress, the PSDB, said that if the allegations proved true, they would demand the resignation of three of their members who are in the president’s cabinet.

“The president is absolutely convinced he committed no crime, but that has to be made clear to the eyes of everyone,” a top presidential aide told Reuters.

Brazil’s Bovespa stock index lost 9 percent, its steepest fall since the 2008 financial crisis, on concerns the investigation could derail Temer’s sweeping fiscal reforms.

Shares of state-controlled companies, such as Banco do Brasil SA and Centrais Elétricas Brasileiras SA, or Eletrobras, lost about a fifth of their value, and the nation’s currency fell 7.5 percent, wiping out its gains for the year.

Brazil’s Treasury and central bank said they stood ready to keep markets liquid before acting to smooth volatility in local currency and bond markets.

Despite Temer’s refusal to resign, Sergio Praça, a political scientist at Brazil’s Getulio Vargas Foundation university, said the leader would have “zero chance of surviving this, once the audio tapes were released. He will likely lose all political support.”

Some Temer allies tried to shore up confidence, but others said his Brazilian Democratic Movement Party, or PMDB, was in tatters.

“Nobody right now knows what to do or what is going to happen,” said a senior aide to party leadership in Congress.

Federal police, meanwhile, closed in on Temer allies as they intensified their three-year Car Wash investigation centering on billions in political kickbacks paid by Brazil’s biggest construction companies in exchange for contracts at state-run oil producer Petrobras and other government enterprises.

More than 90 leading business and political figures have been convicted so far in the probe, and dozens of leading lawmakers and a third of Temer’s cabinet are under investigation.

Officers in the southern city of Curitiba searched the home of federal deputy Rodrido Rocha Loures, a longtime confidant of Temer and a member of the president’s party. Loures is accused of receiving bribes on behalf of Temer, which he denies.

The O Globo newspaper reported on Wednesday night that Temer met with JBS’ Batista in March.

Batista, who has secured a plea-bargain deal with prosecutors, recorded the conversation in which he and Temer allegedly discussed making illegal payments to jailed former House Speaker Eduardo Cunha, of the PMDB, to keep him from testifying about corruption.

Cunha, who orchestrated Rousseff’s impeachment, was sentenced to 15 years in March for tax evasion, money laundering and corruption, as part of Operation Car Wash.

Three people with direct knowledge of the JBS investigation said the O Globo report was accurate.

JBS, which grew rapidly under 13 years of leftist Workers Party rule due largely to low-cost loans from Brazil’s national development bank, said on Thursday that it had no comment on the situation.

Ueslei Marcelino / Reuters Brazil's President Michel Temer reacts during a meeting with government leaders of the Brazilian federal senate, at the Planalto Palace in Brasilia, Brazil May 9, 2017.

TEMER IN TROUBLE

Temer, whose government has a 9-percent approval rating, had already been named in plea bargain testimony for negotiating millions in illegal campaign funding, which he denies.

If Temer eventually resigns or is impeached, Brazil’s constitution calls for the leader of the lower house to temporarily take over and for Congress to name a successor within 30 days.

But with so many lawmakers under investigation for corruption, there are widespread calls for the constitution be changed to allow for direct elections now.

Activist groups from across the political spectrum took to social media, calling for protests this weekend. Should large demonstrations occur, pressure on Temer to step aside would increase significantly.

Also on Thursday, federal prosecutor Rodrigo Janot asked the Supreme Court’s permission to arrest Senator Aecio Neves on allegations he asked Batista for bribes.

A key government ally, Neves lost the 2014 presidential election against Rousseff. The top court suspended Neves from the Senate.

Rousseff was impeached last year for breaking budgetary laws, but she and her supporters have accused Temer, her vice president, of orchestrating her ouster as part of a soft “coup” meant to halt the Car Wash investigation.

(Reporting By Anthony Boadle, Ricardo Brito, Alonso Soto and Lisandra Paraguassu in Brasilia, Brad Brooks and Bruno Federowski in Sao Paulo and Pedro Fonseca in Rio de Janeiro.; Writing by Brad Brooks; Editing by Lisa Von Ahn and Andrew Hay)