RIO DE JANEIRO, Brazil - A widening corruption probe in Brazil, complete with a Watergate-style break-in, is implicating the ruling Workers' Party, U.S. pharmaceutical giants and a sultry fashion model.

It all began last year when Brazilian police began looking into a ring of Health Ministry functionaries, lobbyists and businessmen who'd allegedly conspired to inflate government purchases of blood and blood derivatives.

Health Minister Humberto Costa sought the investigation, but investigators are now looking at his ministry's purchases of everything from insulin and condoms to security services. The probe, dubbed "Operation Vampire," also involves alleged illegal campaign contributions that were intended to win or influence Health Ministry business, putting President Luiz Inacio Lula da Silva on the hot seat.

People arrested in the case have alleged that foreign drug companies or their representatives made extensive under-the-table campaign contributions to da Silva's Workers' Party. The party's campaign treasurer, Delubio Soares, said election authorities have certified the books as clean, but investigators want to talk with him.

Police say inflated drug prices and skimming have cost the Health Ministry up to $120 million since 1997. Brazil's hemophiliacs, diabetics and kidney dialysis patients are the main victims; they rely on government-provided insulin, imported blood and blood derivatives and the Health Ministry buys only as much of them as its budget can cover.

The scandal broke with stunning news that Costa's close friend and adviser Luiz Claudio Gomes da Silva - no relation to the president - had been arrested May 19 along with other alleged members of the so-called Blood Mafia. Costa had named Gomes da Silva head of the Health Ministry's office for government-supplied medicines. Police seized more than $30,000 from his home and more than $100,000 from the home of a lobbyist who worked with him.

Then, on June 4, there was a break-in at the Health Ministry annex, where paperwork on bids and purchases - including deals Gomes da Silva oversaw - were stored in a basement office. The break-in occurred during a Friday night party for children of Health Ministry personnel and the intruders riffled through the files.

Sex appeal entered the case a week later on reports that police were interviewing Ellen Jabour, a sultry model and TV personality. Her father, Jaisler Jabour, an accused ringleader of the Blood Mafia, allegedly used companies chartered in his daughters' names to launder the ring's skimmed money. Whether Ellen Jabour was active in the companies wasn't clear.

Jaisler Jabour is an influential lobbyist representing Octapharma, a Swiss-based multinational specializing in blood plasma. Police say their investigation began last March following a complaint from the Brazil office of U.S. medical giant Baxter International of Deerfield, Ill., which alleged fraud in the government's purchase of blood derivatives from Octapharma.

Jabour and Gomes da Silva, who had been arrested earlier, are among 17 people named Friday when federal police handed over results of their massive investigation to federal prosecutors. Prosecutors must decide whether to file formal charges.

U.S. pharmaceutical giants Merck and Eli Lilly are also caught up in the scandal. Transcripts obtained by Knight Ridder of police wiretaps show the Health Ministry's head of bidding, Mario Machado da Silva, calling Merck's government affairs representative at home late at night on Jan. 13 to arrange a secret meeting at a bus station.

In the transcripts, Machado da Silva promises Merck's Hercules Nascimetno "good news" and adds, "It won't be on our level, no. It will be on the level of your people coming from the United States."

Machado da Silva, who police allege sought "consulting" fees to steer bids to companies, also phoned on Jan. 14 Nivaldo Pavan, a semi-retired Eli Lilly representative, seeking Lilly's participation in bidding for insulin.

In a statement to Knight Ridder, Eli Lilly confirmed being invited to participate in new Health Ministry bids and meeting with Costa. Officials in the company's Brazilian subsidiary said they arranged the meeting, not an external lobbyist. Eli Lilly denied making any campaign contributions in Brazil.

Anthonius Plohoros, a spokesman for Merck, which is based in Whitehouse Station, N.J., responded: "Merck has never been approached by any government representative with a proposal for consulting services. Merck does not use an external consultant or lobbyist to do business with the ministry of health," in Brazil.

Merck's Brazil spokesman, Joao Sanches, said the late-night calls from the head of bidding to the government-affairs representative aren't unusual.

"Contact with government officials is part of our standard business practice and are done with the highest ethical practices," he said.

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