The BBC's Steven Cviic reports

Communications Minister Luiz Carlos Mendonca de Barros, his brother Foreign Trade Secretary Jose Roberto Mendonca de Barros and the head of the National Development Bank Andre Lara Resende all stepped down.

Luiz Carlos Mendonca de Barros is a member of President Cardoso's Social Democratic Party.

Officials said that President Fernando Henrique Cardoso accepted their decision to leave despite asking them to stay.

The political scandal broke two weeks ago when illegally recorded telephone conversations involving the three men were leaked.

Austerity package

The scandal came at a difficult time for the government which is trying to ensure the passage of financial austerity measures in Congress.

The scandal over the July privatisation of Telebras has overshadowed the precarious situation of the world's eighth-biggest economy, which is struggling to avoid a financial meltdown.

But despite the political turmoil, the markets remained stable.

"This surgical approach has solved the problem. The departure of the three restores the government's agenda in Congress," said Geddel Vieira Lima, lower house whip of the Democratic Movement Party, a powerful member of Cardoso's alliance.

Congress has so far approved several measures included in the austerity plan essential to qualify Brazil for $41.5bn in foreign loans led by the International Monetary Fund.

Further voting was due to continue this week.

Allegations

The scandal erupted when published excerpts of the phone conversations suggested the minister and the bank president had sought to favour a consortium - run by a former Central Bank president and friend - in the sale of Tele Norte Leste, one of Telebras' 12 subsidiaries, in July.

In the end, the consortium bought another Telebras company, preventing it from bidding for Tele Norte Leste which went to a group of Brazilian businessmen.

Federal attorneys will investigate the case to see whether the sale of Tele Norte Leste should be annulled, a justice official said.

The investigation will also try to identify those responsible for the illegal recording and see if the officials broke anti-corruption laws, he added.

Edited tapes

Minister Luiz Carlos Mendonca de Barros told a Senate hearing last week he was merely trying to ensure his friend's group took part in the auction to boost competition and bidding prices.

He said the tape had been edited to imply favouritism.

But top politicians from government-allied parties demanded his resignation when more details of the tapes emerged.