By Matt Siegel
SYDNEY, March 19 (Reuters) - Conservative Australian Prime Minister Tony Abbott's government suffered its first major setback since winning power last year when the assistant treasurer stood aside on Wednesday amid corruption allegations from his time in state politics.
While not formally a member of Cabinet, Senator Arthur Sinodinos plays a senior role in Abbott's government and is a power broker from New South Wales (NSW), Australia's most populous state.
Sinodinos will retain his seat in the national parliament. He is the highest-ranking government official to be caught up in a wide-ranging investigation into corruption over state government contracts and land deals in New South Wales.
"I do not want this sideshow to be an unnecessary distraction to important work of the Government which I am proud to serve," Sinodinos said of the inquiry.
"Whilst this process is under way I will therefore be standing aside as assistant treasurer," he said in a brief statement to the upper house Senate.
Sinodinos served as director of Australian Water Holdings (AWH), which is being investigated by the New South Wales Independent Commission Against Corruption as part of a wider inquiry into disgraced former NSW lawmaker Eddie Obeid.
Obeid was a power broker in the NSW branch of the Labor party, which is in opposition to Abbott's government at the national level.
The commission has heard evidence that Sinodinos, who was formerly the state treasurer of Abbott's Liberal Party, was paid A$200,000 ($182,600) for working at AWH just 100 hours a year and that he stood to make up to A$20 million from an infrastructure deal with a state-owned company.
Sinodinos' announcement came after days of withering criticism from Labor in the national parliament and is the first instance of the investigation spreading beyond New South Wales onto the federal stage.
Abbott reiterated his support for Sinodinos despite a barrage of opposition questions.
"Senator Sinodinos has done the right and decent thing as you'd expect and for someone who has given our country such long and faithful service," Abbott said.
"I look forward to his restoration to the ministry." ($1 = 1.0950 Australian dollars) (Reporting by Matt Siegel; Editing by Paul Tait)