(Adds details of reported Palocci testimony)
By Tatiana Bautzer and Carolina Mandl
SAO PAULO, Oct 3 (Reuters) - Brazilian prosecutors said on Thursday they were investigating Banco BTG Pactual SA and former central bank and finance ministry officials over the alleged illegal leaking of interest rate decisions between 2010 and 2012.
BTG Pactual said in a statement the fund under investigation was not managed by the bank and that it did not make investment decisions for the fund. BTG Pactual said it administered the fund, which was managed by a financial market professional who was the fund's sole investor and had no relation to the bank.
Shares of BTG Pactual fell about 4% in Sao Paolo trading, paring losses of as much as 10% when the news broke.
Federal prosecutors said in a statement that the investigation was triggered by the plea bargain testimony of former Finance Minister Antonio Palocci.
An investment fund at BTG Pactual made "extraordinary" profits with the leaked information, the prosecutors said, but did not name the specific fund or the government officials suspected of being involved.
In BTG Pactual's statement, it named the fund as Bintang FIM, which was managed by Marcelo Augusto Lustosa de Souza, according to the Brazilian securities regulator CVM. He could not immediately be reached for comment.
In April 2012, the Bintang fund had 50 million reais ($12 million) under management, according to CVM data, which shows the fund was closed in 2013.
Prosecutors said they were investigating crimes of corruption, insider trading and money laundering in the case.
Federal police raided BTG's headquarters in Sao Paulo, the statement said. The full police report is sealed. The central bank said it had not been informed of the content of the probe.
Brazilian financial newspaper Valor Economico reported in 2012 that the Bintang fund had gains in excess of 400% the previous year.
In an interview with Valor, fund manager Lustosa said he was betting on interest rate cuts, against the expectations of most investors at that time.
The period between 2010 and 2012 was relatively volatile for Brazilian interest rates and included an abrupt shift from rate hikes to rate cuts in July 2011. Of Copom's 24 monetary policy decisions over the three calendar years, there were 18 rate changes - eight hikes and 10 cuts. Most were moves of 50 or 75 basis points.
The benchmark Selic rate reached a high of 12.50% in July 2011 and a then-record low of 7.25% in October 2012.
Newspaper O Estado de S. Paulo on Thursday published what it said was the plea bargain testimony of Palocci describing a meeting between former central bank chief Alexandre Tombini and then-Finance Minister Guido Mantega in August 2011 where they discussed a plan to cut rates.
Mantega later told BTG Pactual founder Andre Esteves about the central bank's next policy move before it was made public, according to the Palocci testimony published by the newspaper.
Esteves was arrested in 2016 in a different corruption probe but was acquitted. He is now asking the central bank to restore his controlling stake in the bank.
Fabio Tofic, Mantega's lawyer, said in a statement that Palocci "has created a false narrative to seduce the police."
Representatives for Esteves at BTG Pactual did not immediately comment on the allegations. Press representatives at the Bank of International Settlements, which Tombini joined last month, did not immediately respond to a request for comment.
Palocci's lawyer said in a statement that he will continue to cooperate with law enforcement.
$1 = 4.0879 reais Reporting by Tatiana Bautzer and Carolina Mandl; Additional reporting by Paula Laier and Alberto Alerigi Jr. in Sao Paulo, Jamie McGeever and Marcela Ayres in Brasilia; Editing by Brad Haynes, Bernadette Baum and Dan Grebler