By Sarah White and Fiona Ortiz
MADRID (Reuters) - Spanish Prime Minister Mariano Rajoy on Saturday strongly denied wrongdoing in a growing corruption scandal that threatens to erode his credibility just as he is making headway against a deep economic crisis.
The ruling People's Party (PP) has been buffeted all week by media reports alleging that its former treasurers operated a slush fund with donations from construction industry executives that were then doled out to Rajoy and other party leaders.
"I need only two words: it's false," Rajoy said in a televised address after an extraordinary meeting of party leaders to discuss the allegations.
Rajoy, who has a reputation for being boring but clean, welcomed an investigation into the affair and said his party would be fully transparent and that he would publish on the internet all of his tax declarations to clear up the scandal.
Last week El Pais newspaper published extracts from what it said were secret ledgers maintained by party treasurers over 20 years.
"It is not true that we (in this party) received cash that we hid from tax officials," Rajoy said in the brief speech. He did not take questions from the media.
Dozens of police in riot gear guarded PP headquarters in central Madrid on Saturday. A small gathering of demonstrators shouted "resign" outside the building after several hundred people protested there on Thursday and Friday nights.
The scandal has hit Rajoy, 57, just as he had appeared to make some headway in the country's financial crisis. Last year doubts over Spain's solvency forced state borrowing costs dangerously high and Rajoy looked to be on the brink of seeking an international bailout as Greece, Portugal and Ireland have.
But market attacks have abated since the European Central Bank pledged it would back Spain.
Rajoy has asked Spaniards for sacrifices and slashed spending. His popularity has plummeted during his 13 months in office as his austerity measures aggravate a deep recession and 26 percent unemployment.
The small opposition United Left party has urged him to resign and call early elections over the scandal. But the PP has an absolute majority in parliament and so far has shown no signs of a split that would allow opponents to carry a vote of no confidence.
The main opposition Socialists have demanded explanations from Rajoy without calling for his resignation. Polls show they would not win an election if it was held now.
Top bankers have called for a rapid response to the scandal at a time when Spain has taken 40 billion euros in European rescue money to clean up its troubled financial sector.
Francisco Gonzalez, Chairman of the country's second-biggest lender BBVA, defended Rajoy on Friday, saying he knew him well and that he was honest.
"There are clearly many bad practices in many parts of our country and these practices need to be eradicated," Gonzalez told a news conference.
"This is an opportunity for Spain to come out much cleaner."
The anti-corruption prosecutor's office said on Friday it was investigating the alleged payments to PP members. El Pais claims it has photocopies of ledgers showing Rajoy received annual payments of 25,200 euros ($34,200) over 11 years.
If he reported the income to tax authorities, and if they are reflected in the party's public accounts, such payments may not necessarily be illegal. But ethical questions would remain.
If the prosecutor finds evidence of a possible crime he will make a report to Spain's High Court, which will then decide whether it opens a judicial investigation, the first step to a possible criminal trial.
Spain's courts are notoriously slow and a judicial probe could take many years to conclude.
In the meantime, Rajoy may struggle to turn around public opinion. A poll before the scandal broke found 96 percent of Spanish adults see corruption as pervasive in politics. Tax evasion and unemployment benefits fraud are rife.
Spending cuts in education and healthcare - to try to tame the public deficit and bring down state borrowing costs - have soured the public mood.
Demonstrators march through the streets of Madrid and other major cities almost every day. A common lament is that the debt-burdened government is going further into debt to bail out banks that lent recklessly to builders during a property bubble.
Spain's prolonged economic boom, which crashed in 2008, was fed by huge expansion in the construction industry. Courts have looked into a number of corruption cases involving builders accused of paying off politicians in exchange for public works contracts or for re-zoning of rural land to allow development.
THE BARCENAS PAPERS
While corruption scandals are common, this is the first in many years to reach so high in the political leadership.
The central figure in the case, former PP treasurer Luis Barcenas, has been under investigation since 2009 for alleged involvement in a kickbacks scheme known as the Gurtel Case.
A number of PP mayors and city council members have had to resign in the Gurtel investigation, but the case has languished, bouncing from one judge to another, and never gone to trial.
The affair jumped back into the public eye in January when court officials said that they had discovered that Barcenas had a Swiss bank account that once held as much as 22 million euros.
Barcenas's lawyer has said the money came from legitimate businesses and that it has now been reported to tax authorities.
"The People's Party does not have and never had accounts in a foreign country and has never issued orders to open accounts in a foreign country. We have nothing to do with it," Rajoy said in his address on Saturday.
El Pais said last week it had obtained 20 photocopied pages of what it says is Barcenas' secret ledger, allegedly showing almost 20 years of cash donations from business executives and a stream of payments.
Barcenas has denied any wrongdoing and has called the El Pais reports "false".
(Additional reporting by Iciar Reinlein and Rodrigo de Miguel; Writing by Fiona Ortiz; Editing by Andrew Roche)
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