UPDATE 1-Brazil states to face conditions in exchange for federal help -minister

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BRASILIA, Dec 21 (Reuters) - The Brazilian government will continue to impose conditions on cash-strapped states in exchange for federal support, Finance Minister Henrique Meirelles said on Wednesday, after lawmakers watered down a debt-relief proposal.

Meirelles said President Michel Temer could veto a bill approved in Congress’ lower house on Tuesday, which allows states in the worst financial condition to halt debt payments and rework commitments with the federal government..

The legislation also reduces debt payments and extends the maturity on 427 billion reais ($127 billion) of debt owed by all of the 27 states.

Lawmakers removed government-proposed measures to force states to increase pension charges on employees and forbid local governments from raising wages and creating new jobs.

The bill, already passed by the Senate, was sent to Temer for his signature.

Even if it is signed into law, the government would negotiate with each state on conditions for receiving debt relief, Meirelles told journalists.

“States will have to meet all the austerity conditions,” Meirelles said, adding that he expects the state of Rio de Janeiro to apply for the program.

Meirelles added that a pension reform proposal is the priority of the Brazilian government, but authorities will continue to unveil microeconomic measures.

Tuesday’s lower house vote put into question Temer’s political support in Congress to approve unpopular reforms to shore up the country’s finances and rescue the economy from a recession that threatens to stretch into a third year.

Temer, weakened politically by a government corruption scandal, this week agreed to release more than 10 billion reais ($3 billion) from an amnesty asset program to states and municipalities even after they scrapped his plan to impose wage freezes in exchange for the money. The move came after states filed a lawsuit to force the government to share the money. ($1 =3.33 reais) (Reporting by Alonso Soto; Writing by Silvio Cascione; Editing by Chizu Nomiyama and W Simon)