* Kanimozhi&${esc.hash}39;s DMK party is ruling Congress&${esc.hash}39; second largest ally
* Congress, DMK say arrest not to affect coalition
* Scandal biggest of several in PM Singh&${esc.hash}39;s second term (Recasts lead with DMK, Congress reaction, adds details, byline)
By C.J. Kuncheria and Henry Foy
NEW DELHI, May 20 (Reuters) - An Indian court sent the daughter of a key government ally on Friday to jail pending trial on charges she handled a ${esc.dollar}47 million bribe in the country&${esc.hash}39;s biggest corruption case.
But her party&${esc.hash}39;s recent election defeat will likely mean it stays in the federal coalition.
Kanimozhi is a lawmaker and daughter of the head of the regional Dravida Munnetra Kazhagam (DMK) party, which gives the Congress party-led alliance a wafer-thin parliamentary majority. But the party&${esc.hash}39;s reputation has been shredded by allegations of corruption.
Hers is the second jailing of a senior party leader on charges of rigging the allocation of telecom licences in 2007/08 which auditors say cost the exchequer up to ${esc.dollar}39 billion, and was seen calling into question the DMK&${esc.hash}39;s support for the government.
Party chief M. Karunanidhi said the DMK&${esc.hash}39;s ties with Congress were still intact. He said he would convene a high-level meeting and consult legal experts on how to secure Kanimozhi&${esc.hash}39;s bail.
A spokesperson from the Congress party told reporters after the verdict that "the coalition remains as before".
"There is enormous pressure on the DMK to do something now, especially as there is a family member in jail," said Mahesh Rangarajan, Delhi University professor. "This is the lowest point in history for the party. They are caught between the devil and the deep blue sea."
A withdrawal of the DMK&${esc.hash}39;s 18 lawmakers from the national coalition would force Prime Minister Manmohan Singh to seek out new partners to restore a majority in parliament , further delaying legislative progress on important economic reforms.
ELECTION DEFEAT
But a withdrawal would also leave the DMK in the political wilderness, given its recent heavy defeat in an election last month that ousted it from power in its bastion state of Tamil Nadu. The AIADMK party, the election winner, has denounced Karunanidhi and his family as the root of all corruption.
Kanimozhi was ordered held pending trial on charges of conspiracy and with handling a 2.14 billion rupee (${esc.dollar}47.6 million) bribe through a television channel in which she owns a 20 percent stake to ensure the allocation of licences.
Judge O.P. Saini rejected her bail application and ordered her kept in detention, her lawyer Ram Jethmalani told reporters, adding she would likely appeal to a higher court.
The DMK poll loss marked a voter backlash against corruption, and Congress has vowed to stamp out graft in Asia&${esc.hash}39;s third-largest economy, with federal elections due in 2014.
The telecoms scandal, which may have cost the equivalent of the defence budget, has battered the coalition government, stymied its agenda for economic reform and hurt foreign direct investment into one of the world&${esc.hash}39;s fastest-growing economies.
Kanimozhi&${esc.hash}39;s party colleague, the former telecoms minister Andimuthu Raja, has been arrested in the case. Others arrested include executives of Reliance ADA group and Sanjay Chandra, the managing director of Telenor&${esc.hash}39;s India partner Unitech . All accused deny the charges.
The Indian joint venture partners of Norway&${esc.hash}39;s Telenor and of UAE&${esc.hash}39;s Etisalat also are charged in the case. Both of the foreign firms say the events described in the charges predate their entry into India.
Norway&${esc.hash}39;s prime minister has written to Singh seeking "fair treatment" for Telenor, saying the firm should not be penalised for "errors others have committed in India". (${esc.dollar}1 = 44.975 Indian rupees) (Editing by Alistair Scrutton and Ron Popeski)
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