* El Mundo editor "Pedro J" Ramirez exits with 15 mln euro payoff
* Harsh critic of ruling party corruption and PM Rajoy
* Made his name revealing state-backed torture of alleged terrorists
By Elisabeth O'Leary and Claudia Cristoferi
MADRID/MILAN, Jan 30 (Reuters) - The influential founding editor of Spain's second-biggest newspaper, El Mundo, stepped down on Thursday after a decline in circulation and a series of revelations of alleged corruption in the ruling party.
Pedro Jose Ramirez, known as Pedro J (pronounced "Hota"), has been sharply critical of Prime Minister Mariano Rajoy, even though El Mundo, part of the Italian RCS group, is considered broadly sympathetic to the ruling conservative People's Party.
Ramirez, who often appears to court controversy, is known for breaking some of Spain's biggest political scandals of the last 25 years, including uncovering death squads backed by the Socialist government in the 1990s and, more recently, allegations of PP corruption.
An insatiable tweeter, he wrote rambling two-page Sunday editorials peppered with historical and literary references taking on everything from the Catalan independence movement to Rajoy's cautious leadership style.
"Editorship of El Mundo will be assigned to Casimiro Garcia-Abadillo, currently deputy editor, with the objective of relaunching its hard copy circulation and further strengthening its digital leadership," RCS said in a statement.
Ramirez left with severance pay of about 15 million euros ($20.5 million), a source close to the matter told Reuters. Local media reported that the newspaper had been losing millions of euros a year, but RCS declined to comment.
The circulation of the paper and its on-line version ORBYT fell 14 percent in 2012, according to the last full-year report available from RCS.
The same source said Ramirez's clash with the government was behind the decision.
But Economy Minister Luis de Guindos said the government had "absolutely not" been involved in the decision, and praised Ramirez as "a great journalist who has left his mark on an era in Spain".
Ramirez, the partner of fashion designer Agatha Ruiz de la Prada, founded the newspaper in 1989. A colourful and outspoken figure, he likes to wear the old-style newspaper editor's caricature braces.
He made his mark in the 1990s when El Mundo revealed that government-backed death squads had tortured and killed suspected members of the violent Basque separatist group ETA. The interior minister of the time eventually went to jail for his involvement.
But after almost 200 people were killed in train bombings in Madrid in 2004, Ramirez and El Mundo lost credibility by repeatedly asserting that it was unclear who was behind the attacks - giving fuel to ETA conspiracy theorists. Spain's High Court found the bombs to be the work of Islamist extremists.
In 2013, El Mundo broke a story alleging illegal financing by the People's Party. Other media followed with more details, and a former PP treasurer who was close to Rajoy is now in jail on charges of embezzlement, money laundering and other crimes. He and the PP both deny wrongdoing.
El Mundo remains Spain's second most-read general-interest newspaper, with a readership of about 1.1 million, behind Prisa's El Pais on 1.8 million, according to the media survey group EGM.
A Milan media analyst, who asked not to be identified, said Ramirez's payoff would make a significant dent in the figures of its owner Unidad Editorial, a unit of RCS, but that there could be benefits for the firm's other media interests.
"Clashing with the government could be counterproductive on regulatory issues relating to TV spectrum or advertising," he said. ($1 = 0.7329 euros) (Edited by Fiona Ortiz and Kevin Liffey)