UPDATE 1-Ex-Brazil finance minister Palocci strikes plea deal - source

(Adds a source confirming the plea deal, background on Palocci and corruption investigation)

BRASILIA, April 26 (Reuters) - Former Brazilian Finance Minister Antonio Palocci has struck a plea deal with federal investigators, a source with direct knowledge of the matter told Reuters on Thursday, raising the stakes in a corruption scandal engulfing high-ranking politicians and prominent businessmen.

Representatives for Palocci, federal police and federal prosecutors did not respond to requests for comment. The plea deal was first reported by the O Globo newspaper.

Palocci served as finance minister under former President Luiz Inácio Lula da Silva, who is serving time for taking bribes, and as chief of staff under Lula’s successor Dilma Rousseff. He served as a key adviser to both leaders during their campaigns.

Palocci was arrested in September 2016 and sentenced to 12 years in prison for corruption and money laundering. Prosecutors said he ran a bribery scheme that funneled illegal money used for campaigns into Lula’s Workers Party.

A plea deal would reduce his prison sentence, though it was not immediately clear by how much.

Lawyers for Palocci have said he has already told prosecutors that Lula accepted bribes from construction firm Odebrecht SA, which is at the center of Brazil’s sweeping political graft investigations.

The firm and other companies have said they paid billions of dollars in bribes to politicians and executives of state-run companies in exchange for winning contracts.

Lula, who insists he will run again for the presidency and widely leads all polls ahead of October’s election, was jailed earlier this month for a corruption conviction that was upheld on appeal. He faces six other graft trials. (Reporting by Ricardo Brito Additional reporting by Bruno Federowski in Brasilia Editing by Hugh Lawson and Tom Brown)