UPDATE 1-Key ally of India's ruling party linked to graft scandal
* Telecom money trail traced to DMK party's TV channel
* Scandal not to threaten coalition government
NEW DELHI, Feb 10 (Reuters) - Indian police on Thursday linked a key ally of the ruling Congress party to a multi-billion dollar telecoms scam, dealing a fresh blow to a government already crippled by corruption scandals.
A police lawyer told a court companies linked to a telecoms firm under investigation for buying mobile licences at unfairly cheap prices had paid 2.14 billion rupees ($47 million) to a TV channel run by the Dravida Munnetra Kazhagam (DMK), which helps the ruling coalition maintain its slim majority in parliament.
The main opposition Bharatiya Janata Party, which had brought parliament to a standstill demanding a probe into India's biggest corruption scandal, has said Prime Minister Manmohan Singh's reliance on the DMK prevented him from quickly probing the case.
The latest court documents come a day after the government appeared close to agreeing to a broad, cross-party investigation in the scandal, paving the way for parliament to resume as normal on Feb. 28 for a session that will see discussions on the budget.
The scam does not threaten the survival of the government, but it has tarnished Singh's reputation and rattled investors in Asia's third largest economy.
While scrambling to control the fallout from the scandal, one of the many during the Congress' second term, the government is also distracted from policymaking, further delaying crucial economic reforms such opening up the retail and financial sectors to foreign investors.
Court documents filed by the Central Bureau of Investigation, and seen by Reuters, showed that a company linked to Shahid Balwa, the vice chairman of a joint venture between a local firm and Abu Dhabi's Etisalat , had given the money to a TV station what was linked to Andimuthu Raja, the disgraced telecoms minister who was sacked over the scandal.
Authorities have arrested Raja, a DMK member, and Balwa in connection with the scandal, in which the government is alleged to have lost as much $39 billion in the award of second-general telecoms licences in 2008.
"There was a transaction of about 2.14 billion rupees from Cineyug Films to Kalaignar TV in the year 2009," the court documents said.
The document said Kalaignar TV, which is controlled by the DMK, was linked to Raja and that the money was given to Cineyug by firms controlled by Balwa and his relatives
Balwa's laywer, Vivek Aggrawal, told the court the money was related to a deal Cineyug was considering with Kalaignar TV.
"At the last moment our talks fizzled out. This money has been returned," he said. DMK officials declined to comment.
Separately, the Supreme Court suggested on Thursday a special court try all cases related to the telecoms scandal. The government has two weeks to respond to the suggestion. ($1=45.7 rupees) (Additional reporting by Devidutta Tripathy; Editing by Krittivas Mukherjee and Miral Fahmy)
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