UPDATE 2-Obama review clears staff in Blagojevich probe

(adds background, quotes)

By Andrew Quinn

WASHINGTON, Dec 23 (Reuters) - U.S. President-elect Barack Obama's office said on Tuesday that an internal audit showed his aides had no improper contact with Illinois Gov. Rod Blagojevich, accused of seeking to sell Obama's Senate seat.

Blagojevich is mired in a corruption investigation that has made headlines and left Obama's transition team scrambling to distance the incoming president from the scandal-tarred governor.

Blagojevich, like Obama a Democrat with political roots in Chicago, has denied any wrongdoing and refused to resign from his job.

The report detailed contacts between Obama staffers, including chief of staff Rahm Emanuel, and employees in Blagojevich's office and concluded there was no indication that any "quid pro quo" arrangement over the job had been suggested or considered by any Obama staffers.

"My inquiry determined that there was nothing at all inappropriate about those conversations," incoming White House attorney Greg Craig said on a conference call.

Craig stressed that Emanuel was the only figure within the transition team to have direct contact with Blagojevich or members of his staff and said "those contacts were totally appropriate and acceptable."

The U.S. attorney's office, in announcing the charges against Blagojevich this month, said Obama was in no way implicated. The transition team review also said Obama had not spoken to the governor about the issues in question.

'ONE OR TWO CALLS'

But the report was unlikely to fully satisfy critics who have accused Obama's team of being less than forthcoming about how much they knew about how Blagojevich was handling the open Senate seat, for which he alone may name a replacement.

The transition office said it had the report ready for release last week but delayed its publication at the request of prosecutors, who were still interviewing witnesses for the Blagojevich probe.

The report conceded that Emanuel had had "one or two" telephone calls with Blagojevich and discussed possible candidates for the Senate seat that Obama vacated after he was elected president Nov. 4.

"Mr. Emanuel recommended Valerie Jarrett because he knew she was interested in the seat," the report said. "He did so before learning -- in further conversations -- that the president-elect had ruled out communicating a preference."

It stressed that at no time did Emanuel discuss a cabinet job, a non-profit position or any other personal benefit for the governor in connection with his Senate choice.

Jarrett, an Obama senior campaign adviser and former Chicago housing developer, took her name out of consideration for the Senate seat on Nov. 9 and has since been named a senior White House adviser.