UPDATE 2-Peru's president to reshuffle cabinet over scandal

(Recasts, adds quotes)

LIMA, Oct 10 (Reuters) - Peruvian President Alan Garcia fired his entire cabinet on Friday in an effort to deal with a widening corruption scandal that has caused the biggest crisis of his administration.

Garcia had faced calls from opposition leaders to reshuffle his cabinet after audio tapes emerged that linked members of his APRA party to a plan to steer lucrative petroleum contracts to favored bidders in exchange for bribes.

Garcia, a staunch supporter of free markets and foreign investment, has seen his approval rating fall to a record low of 19 percent despite surging economic growth of 9 percent a year.

"I told them they should not be ashamed of losing their jobs because of politics," said Garcia, who was flanked by his cabinet.

Prime Minister Jorge del Castillo, Garcia's right-hand man, was mentioned in the taped conversations as someone who would provide favors in a plan to rig auctions of oil and gas concessions. Del Castillo also had lengthy meetings with APRA party members who were working as lobbyists and involved in the auctions, but he has denied wrongdoing.

The former mines and energy minister, Juan Valdivia, already had been forced to quit, along with two other energy officials.

Garcia may end up reappointing some members of his cabinet. Finance Minister Luis Valdivieso, a former IMF official who recently joined Garcia's administration, could stay on.

Peru's Congress has voted to investigate all oil and gas concessions granted since 2006, and will scrutinize dozens of contracts signed between Peru and foreign oil companies for signs of irregularities in the country's growing petroleum sector.

Garcia is a former leftist whose first term as president in the 1980s ended in economic disaster. He has since become a champion of mainstream economic policies and was elected to lead Peru for a second time in 2006, but voters cite corruption as one of their top complaints about Garcia's administration.

Peruvian presidents often struggle in opinion polls. Garcia's predecessor, Alejandro Toledo, served out his term with approval ratings of less than 10 percent.

Opposition leaders eyeing presidential elections in 2011, including Ollanta Humala, the ultra-nationalist leader who spooked markets when he nearly beat Garcia in 2006, led calls for the cabinet reshuffle. (Reporting by Marco Aquino, Maria Luisa Palomino and Terry Wade; Editing by Dana Ford and Eric Walsh)