JAKARTA, INDONESIA (AFP) - Indonesia's finance minister and central bank chief on Tuesday defended a US$704 million ($975 million) lifeline thrown to a failed lender, which has become the centre of the country's latest graft scandal.

Finance Minister Sri Mulyani Indrawati and former Bank Indonesia (BI) governor Boediono, now Indonesia's vice-president, have come under fire for their roles in authorising the 6.7-trillion-rupiah ($984 million) bailout late last year.

Indonesia's Supreme Audit Agency head Hadi Poernomo, presenting a report Monday on the bailout of the lender, Bank Century, said there were strong indications of "violations" and recommended a full investigation.

But Indrawati repeated the government's assertions that the rescue package was essential to prevent systematic risk to the economy during the global financial crisis.

"Our focus at the time was to avoid another crisis. Indonesia had been in a crisis before, which was prompted by collapsing banks," she told reporters. "We didn't want the contagion effect this time."

The total funds disbursed to save the relatively minor bank were 10 times the amount initially deemed necessary to prevent the lender's collapse.

Opposition lawmakers and anti-graft activists have demanded a full-scale inquiry into allegations that the injection of government funds ultimately benefited wealthy friends of Indonesian President Susilo Bambang Yudhoyono.

In an address to the nation late Monday, the president welcomed a full inquiry to clear the air even though his own Democratic Party had for weeks opposed lawmakers' efforts to initiate a parliamentary probe.

"There are rumours saying that some part of the money was set to be channelled to the Democratic Party's campaign fund and for (my) candidacy," he said, referring to July elections he won partly on promises of clean government.

"This is very mean slander and it's very hurtful ... I want the questions I mentioned to get a firm and true answer."

Acting BI Governor Darmin Nasution said the decision to rescue Bank Century was based on broad economic questions and not on the political connections of its biggest depositors.

"If there is a systemic effect, then we bail it out," he told reporters alongside the finance minister.

"The closing of Century could have affected the payment system and created negative sentiment in the capital market," he added, echoing earlier statements by Vice-President Boediono.

But chief auditor Poernomo said in his report that the central bank had provided no evidence of the systematic risks posed by Bank Century's failure, and appeared to have based its decisions on other considerations.

He said 2.8 trillion rupiah injected into the bank after 18 December, 2008 had "no legal basis".

The controversy and another scandal involving an alleged conspiracy by police and prosecutors to frame the country's anti-graft agency sparked protests in Indonesia on Tuesday.

Demonstrators at largely symbolic protests burned photographs of Yudhoyono and Boediono and demanded their resignations.

Indonesia's banking system has emerged relatively unscathed from the global financial crisis, which erupted last year, as it had little exposure to the US subprime mortgage market or related credit default swaps.

Industry Minister Mohammad Suleman Hidayat warned last month that doubts about legal certainty in Southeast Asia's biggest economy would deter foreign investment deemed vital to its long-term growth.