(Adds statement by senator, background)
BRASILIA, May 18 (Reuters) - The Brazilian senator in charge of drafting recommendations for labor reform said on Thursday he was canceling work on the proposal due to the political crisis triggered by allegations that President Michel Temer condoned corruption.
Senator Ricardo Ferraço's decision was an indication that Temer's reform agenda, aimed at restoring fiscal discipline and economic growth to Latin America's largest nation, was on hold.
"The institutional crisis we are facing is devastating and we need to prioritize finding a solution," Ferraço said in a statement. "Everything else is secondary now."
Temer's government was hoping for rapid approval of the bill modernizing Brazil's labor laws to make way for passage of unpopular austerity measures to narrow a gaping budget deficit.
The bill has already passed the lower House, and Ferraço has been studying the bill. He can improve it with recommendations to add or remove items.
The reform agenda has been "suspended," an aide to the senator said, after allegations were made on Wednesday that Temer condoned the bribery of a witness in the "Car Wash" corruption scandal, which threatens his hold on office.
"The reform agenda is back to zero, everything is up in the air because it was being coordinated by the government and its coalition is losing backers," the aide said.
Brazilian markets tumbled in the crisis triggered by the allegations that fueled bets he could be ousted, undoing his efforts to reform a costly social security system that is the main cause of the deficit. (Reporting by Anthony Boadle)