CORRECTED-UPDATE 1-Canadian prime minister's top aide quits over expenses scandal

Sun May 19, 2013 3:53pm EDT

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(Corrects 20th para to show Novak is principal secretary not deputy chief of staff)

* Expenses crisis threatens to undermine government

* Conservatives trailing in opinion polls

* Opposition demands probe into scandal

By David Ljunggren

OTTAWA, May 19 (Reuters) - The top aide to Canadian Prime Minister Stephen Harper abruptly resigned on Sunday over his role in an mounting expenses scandal which is threatening to undermine the Conservative government.

Nigel Wright, Harper's chief of staff, quit after secretly giving a C$90,000 ($87,000) check in February to Mike Duffy, a member of the upper Senate chamber, to help him cover living expenses he had improperly claimed. News of the gift leaked late on Tuesday.

Opposition legislators said the check broke ethics rules that forbid senators from taking presents and made a mockery of the government's repeated promises to increase accountability in Ottawa. Duffy, a former national television journalist, resigned from the Conservative caucus on Thursday.

Wright's departure reflects the pressure Harper is under. Officials told reporters on Friday that the chief of staff - who says he did not tell Harper about the check - would be staying.

"In light of the controversy surrounding my handling of matters involving Senator Duffy, the prime minister has accepted my resignation," Wright said in a statement.

"I regret the impact of this matter on the government, our caucus, and all of my colleagues," added Wright, a businessman who had been on secondment to Harper's office from private equity firm Onex Corp. He started work on Jan 1, 2011.

The expenses scandal is one of the biggest crises to hit the Conservatives since they took power in early 2006 promising to clean up government after a series of scandals helped bring down the previous Liberal administration.

The Conservatives are in "full-out political panic," said Charlie Angus, a member of parliament and the ethics critic for the official opposition New Democratic Party. Angus said Wright's resignation would not halt the NDP's call for an official probe into the matter.

In a sign of the potential damage the scandal could do to the government, Conservative MP Brent Rathgeber told Global Television that his voters were angry.

"Any suggestion that taxpayers are treated disrespectfully is met with significant concern, I would say even angst," said Rathgeber, who represents a constituency in the western province of Alberta, a ruling party stronghold.

Pamela Wallin, another Conservative senator whose expenses have been questioned, quit the caucus late on Friday. Wallin is also a former television journalist.

Opinion polls show the Conservatives trailing the Liberals, who have steadily grown more popular since Justin Trudeau - the telegenic son of former Liberal prime minister Pierre Trudeau - was elected leader last month.

Harper said he had accepted Wright's resignation with great regret. The next election is not due until October 2015 and the Conservatives have a comfortable majority in the House of Commons.

But Harper could be in for a tough two years in parliament if he doesn't move quickly to draw a line under the matter. Canada's federal ethics commissioner, however, is examining whether Wright broke government rules about giving gifts.

Conservative MP Michelle Rempel, who holds a junior position as parliamentary secretary to the environment minister, was the only member of the cabinet to respond immediately to the scandal. She told CTV she was "disappointed in what appears to be some serious problems on behalf of one of our former senators."

Harper - who leaves for a South American trip on Tuesday - has twice previously shut down Canada's parliament to sidestep political problems. Harper spokesman Andrew MacDougall dismissed reports saying the prime minister might do the same next month.

Harper named Duffy to the unelected Senate in December 2008 and he was a popular and effective fund-raiser for the party.

The Conservatives initially said he had shown leadership by taking the check rather than leaving taxpayers on the hook for the C$90,000. Their support vanished amid reports Duffy had claimed daily living expenses from the Senate while campaigning for the Conservatives ahead of a federal election in May 2011.

"This stinks from beginning to end. The Prime Minister's wilful blindness is a travesty. All threads lead to him and only he can provide full accountability," Liberal Party Deputy Leader Ralph Goodale said in a statement.

Wright will be replaced by Ray Novak, currently Harper's principal secretary, a Conservative official told Reuters.

($1=$1.03 Canadian) (Reporting by David Ljunggren; Editing by Paul Simao)

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